Is Hurricane Season Bad for the Stock Market?

In the first half of the 20th century, August stock markets were dominated by the beginning of harvest season. Before World War II, most Americans lived on the farm, making the fall harvest a season when all their hard work paid off.� August was the best month of the year in the stock market, too: �Harvesting made August the best stock market month, 1901-1950,� according to the Stock Traders Almanac, 2010.

Since 1950, however, August has had a mixed track record: Now that only 2% of Americans farm, the market has lost its potent fertilizer for fueling August profits. Yes, the Dow rose in 35 of the last 60 Augusts, falling only 25 times, but August has been the second-worst month for the Dow and S&P since 1987.*

There is an important footnote to that statement: Every few years, unusual extenuating circumstances send the August Dow down double-digits: Saddam Hussein�s invasion of Kuwait on August 2, 1990 sent the market down 10% in August. Then, the hedge fund crisis of 1998 sent the Dow down 15% in August.

Hurricane season roughly overlaps the worst stock market months.� Hurricane season officially runs from June 1 to November 30 � somewhat overlapping the �sell in May and go away� theory that has dominated stock-market trading strategies over the last few decades.� But hurricanes hardly happen (to quote Henry Higgins) in June or November. Practically speaking, the Hurricane season is shaped like a bell curve, with the most serious danger running from August through October.� That, in turn, coincides with the market�s worst months, namely September and October.� This gives rise to the historic �market hurricane season.�

Are hurricanes and market collapses related? Not much, but a little: The worst hurricane damage in recent years came in 2005, with Katrina�s fury still being felt in New Orleans, along with a killer Hurricane Rita hitting the Texas coast and Wilma ravaging a trail across Florida.� Those three (and several other) 2005 blasts (don�t forget Dennis and Emily) caused an estimated 3,865 deaths and $130 billion in damage.

There is a weak market parallel here.� Stocks fell 1.9% in the hurricane months of 2005, despite an overall rising market that year. If you recall the Katrina disaster, there were �expert� warnings of a new wave of tropical hurricanes coming, allegedly caused by global warming; but no hurricanes made U.S. landfall in 2006 for the first time since 1994, and the market had a strong 8% surge during the 2006 hurricane season.

If you define the hurricane season as August 1 to October 30, the market rose in three of the last five years. Here are the numbers:

• 2005�� Dow Jones lost -1.89%. Killer storms Katrina, Rita, and Wilma hit.
• 2006 � Dow Jones added +8.00%. No hurricanes hit the U.S.
• 2007 � Dow Jones added � �+5.43%. Hurricane Dean hit that year, with 175 mph winds.
• 2008�� Dow Jones lost� -18.04%. That year was Hurricane Ike (145 mph).
• 2009�� Dow Jones added�� +5.90%. Last year, we saw Hurricane Bill (135 mph).

The real cause of the 2008 crisis was the financial system�s collapse, of course, not hurricane Ike.� But one vital lesson we can learn from history is that most hurricane seasons pass without serious damage and most markets survive the September/October scary-season with small net gains.� But it�s those once-or-twice-per-decade crashes (like 2002 and 2008) that cause investors to shy away from stocks in August.

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