Topline
This week, Charles Schwab issued a warning that the first El Nio event in seven years could cool the stock market by bringing up a little-discussed factor that could potentially cause inflation to soar once more.
Extreme weather may shortly raise the stock market’s temperature.
Major Facts
Jeffrey Kleintop, chief global investment strategist for Charles Schwab, wrote on Monday that the economic effects of extreme weather events like record-breaking global temperatures and the Canadian wildfires, which El Nio may soon make worse, “could be significant for both inflation and economic activity.”
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Though “weather rarely has a material impact on overall markets,” Kleintop predicts that this time could be different due to stocks’ heightened sensitivity to inflation and the likelihood that price increases due to severe weather will be concentrated in food and energy, as crop yields are threatened and energy grids feel the pain of people trying to stay cool.
The potential increase in food and energy prices would coincide with a growing sense of optimism on Wall Street that inflation has subsided and that the Federal Reserve and other central banks will halt their campaigns to raise interest rates.
Kleintop observes that the previous El Nio event coincided with a 15% decline in the S&P 500 between 2015 and 2016, although this decline was temporary and is not considered a direct result of the weather.
A decline in U.S. equities at this time would be a significant surprise, given their recent rally. The S&P is up nearly 20% year-to-date, and over 40% of its constituents have experienced double-digit gains.
Significant History
The World Meteorological Organization of the United Nations determined earlier this month that a new El Nio event has begun.
According to the National Ocean Service, El Nio occurs when the water temperatures in the Pacific Ocean rise substantially above their average levels, causing increased precipitation in the southern United States and higher temperatures in the northern states.
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In recent years, the COVID-19 pandemic and the Russian invasion of Ukraine have also contributed to the increase in inflation.
Big Number
$650 billion. According to Morgan Stanley, this is how much climate events will cost the global economy from 2017 to 2019.
Tangent
The Treasury Department established the Climate-related Financial Risk Advisory Committee in October 2012 to evaluate the financial risks connected with weather and climate events.
Treasury Secretary Janet Yellen stated at the time, “Evaluating climate-related financial risk is a complex and crucial task, and I am grateful that this committee is willing to undertake it.
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