It was a busy, eventful week despite being shortened by the Labor Day holiday. Just a week after the destruction created by hurricane Harvey in Texas, another massive storm system was threatening virtually the entire state of Florida in what can only be thought of as a one-two punch for the US by mother nature following several years with relatively quiet hurricane seasons. If those storms were not enough, Mexico experienced its biggest earthquake in a century that also created widespread destruction in our neighboring country. Financial indexes including the S&P, Dow, and Nasdaq each logged declines of between -0.6% and -1.2% following a 2-week win streak as these weather-related events seemed to overshadow all else. The most notable non-weather item was the bi-partisan effort by the Trump administration and Democrats to approve a 3-month extension to the Federal debt limit and budget, while also tying the legislation to a hurricane relief package. The move was reported to draw anger from Republican congressional leaders, who were sidestepped by Trump based on recent infighting and what seems to be an inability to move legislative priorities forward.
From an economic perspective, weather-related events are introducing noise to what was previously a tone of global economic stability. Arguably the data series most likely to reveal impact from hurricanes is US employment-related, and indeed that is showing to be the case. Unemployment claims jumped higher last week, and would seem positioned to do the same again this week. Company sentiment is also tapering off a touch; but this pattern was well-documented in the lead-up and post-event numbers for similar impactful weather crises like Katrina. Often we are asked how destructive weather events like these will impact economic growth. Interesting is that while these events create significant destruction and loss, they usually do not meaningfully dampen broader economic activity; rather they shift how and where money is being spent (rebuilding) in the short-run.
With two significant political risks of the debt ceiling and Federal budget delayed for several months, other important questions come into focus. The near-term risk of a stalemate on Federal debt and/or government shutdown is resolved, but has that impacted the time frame for which meaningful tax reform might be able to occur? The worry is, did kicking the debate on debt limit down the road (just 3 short months) also push tax reform further out as well? As we have noted in recent weeks, markets have all but fully concluded that tax reform will not occur. Yet many small businesses and some market strategists continue to believe the chances remain higher. If that minority is correct, the market could enjoy a nice surge if/when reform and/or repatriation of foreign profits is successful, but the longer it takes the older this economic cycle becomes and potentially mutes some of the positive boost it would provide. As we enter a new week, markets appear to be taking some relief in early reports that hurricane Irma either eased or was less of a direct hit than originally feared and that damage is not as bad as it could have been. Most important of all, we are thankful to also hear from many clients and friends who were in close proximity to the severe weather events that they likewise are safe. We offer our heartfelt prayers for their continued safety and that the weeks and months of cleanup and rebuilding ahead can go smoothly as possible.