It seems counter intuitive that markets would rise after a huge disaster that probably affects multiple industries like oil or produce.

For example, can someone explain why the US markets actually rose in the days following hurricane Harvey?

Edit: changed title to include natural disasters as a whole.

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    Note that by the time the hurricane makes landfall, the markets have already incorporated the expected damage into the prices. What you see in the days after is only the effect of new information: whether the damage is more or less than expected. – suriv Sep 2 '17 at 2:17
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    Hurricane Harvey did affect many plants producing ethylene which is important for making plastic. Texas accounts for more than half of the ethylene consumption in the US. The damage done to these plants will not be known until they start back up, but if there is significant damage it could cause manufacturing companies to miss their commitments, and could increase the price of anything that uses plastic (ie. just about everything). We'll see what happens. – Mr. Me Sep 2 '17 at 21:32
  • A storm of this magnitude will cause government assistance to be provided, even with a stingy Congress. And the money will be obtained not by raising taxes, but by going further into debt. This is bad for the average Joe, but good for the financial markets. – Hot Licks Sep 2 '17 at 22:57
  • Have you considering accepting an answer? – luchonacho Sep 15 '17 at 9:51
up vote 10 down vote accepted

This news article with some statements from financial workers makes a case that usually big storms don't impact the national economy that much, even despite the large localized damages. While insurance companies will suffer in the stock market because of all those payouts they'll have to give, oil prices as you mentioned will be impacted, but in this case, gas prices will rise because of the change in the supply curve, so they will actually benefit in the stock market. The various effects combined end up with the stock market not really going up or down. It's more or less a wash.

To think of it another way, a shock in the short term capital in the economy won't particularly change the steady state level of capital. If markets know this, there isn't a need for huge changes in prices. In the case of the insurance companies, their money isn't so much based on capital as it is based on states of the world, so they will end up needing to adjust prices.

There are other reasons why the stock market may not have moved up or down in particular, but for the most part it is speculation, and even my answer is just intuitive exposition.

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    "It's more or less a wash" is quite the pun you have there... – Mehrdad Sep 2 '17 at 3:29
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    Oh Lord Almighty I did not even think of that lol. A bit more morbid than my usual jokes xd...I'll take full credit for it though – Kitsune Cavalry Sep 2 '17 at 3:38

There is some research on this area. Overall, the effect of natural disasters on stock markets depend on type of disaster, industry, and country.

For example, this paper studies 30 natural disasters, from a variety of countries (including Hurricane Katrina, in the US). It concludes:

We find that different natural disasters have different effects on stock markets and industries. Our evidence suggests that while earthquakes, hurricanes and tornadoes could negatively affect market returns several weeks after the events, other disasters such as floods, tsunamis and volcanic eruptions have limited impact on stock markets. We also find that construction and materials industry is generally positively affected by natural disasters but non-life and travel industries are likely to suffer negative effects.

This other paper has the following abstract:

This paper investigates the impact of natural disasters on the insurance sector as well as on the composite stock market in Japan and the US. GARCH models are employed to capture both wealth and risk effects of natural disasters. There are no wealth effects in the US and Japan composite stock markets, indicating that these markets can well diversify away the impact of natural disasters on stock return, but there are significant wealth effects in the US and Japan insurance sectors. While US investors in the insurance sector lose, those in Japan gain. All markets except the composite stock market in Japan face risk effects of natural disasters.

There are several more studies. For example, this one focuses solely on earthquakes, and this one studies Australia only.

"Natural disasters" which are forecastable in advance (to some degree) are a particular case of a wider issue. Markets don't like uncertainty. Once the disaster has happened, the uncertainty is gone.

The same applies to elections, etc. For the market, it doesn't matter so much who wins as knowing who has won.

The arguments about increased economic activity, increased government money supply, etc, are true as far as they go, but the biggest factors that move markets will always be "fear and greed" so long as humans are involved in the market at all.

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    "it doesn't matter so much who wins as knowing who has won." Surely the FTSE would have reacted quite differently if Corbyn would have won the UK general election this year. – luchonacho Sep 2 '17 at 13:35

I second @KitsuneCavalry, and add that Harvey damaged a lot of capital stock i.e. dwelling and non-dwelling, infrastructure etc. Well, that's a bad news, but also a good news as investors expect big spending by the government to rebuild the lost or damaged capital stock. As expected, Trump has requested billions (from the congress) for regeneration and rebuilding of the affected areas. These billions are going to have miltiplier effects in the wider economy as almost all listed firms set to benefit from this spending. Government will pay for reconstruction of the roads, electricity grid, bridges, etc.

Simlarly, insurance firms pay for the construction of private and commerical properties. They will have to borrow, issue shares or liquidate investments, and investment banks benefit from these activities. Many listed firms could receive a share of the spending.

Dividend increases could be on the way, and given the EMH, rising share prices already reflect these changes.

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    I think in your and @KitsuneCavalry there is, possibly unintentional, broken window fallacy. In the end those things you mention may offset large portions of the damage but it is still a net loss (though it might disappear in noise). However as the hurricanes happen regularly those were factored in price anyway so it doesn't change, overall, expectation of long-term profit. – Maciej Piechotka Sep 2 '17 at 0:46
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    My argument in particular isn't arguing that the destruction itself is generating economic activity. My argument is that markets have already priced the risk of disasters or that the negative impact can be ultimately mitigated. – Kitsune Cavalry Sep 2 '17 at 3:40

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