Stormy Weather?

What does Sandy mean for investors?

Hurricane Sandy reeked devastation all along the East Coast. It’s impossible to see the destruction along the New Jersey, New York, and Connecticut shore and not be moved. Homes reduced to rubble; businesses flattened—it’s reasonable to wonder whether some investors might be hurt by the physical damage that the storm wrought.

The most natural concern would be municipal bonds. For years analysts have warned about their credit quality, and New Jersey has been especially troubled, with accounting issues and a slow-growth economy. Could Superstorm Sandy be the tipping point that pushes local governments over the edge?

When evaluating a credit, it’s important to remember what the real assets are. Governments are supported by taxes, and buildings don’t pay taxes, people do. Economic studies show that the physical damage a natural disaster brings doesn’t really hurt the local economy; in fact, the clean-up and rebuilding efforts provide a modest boost. Some retailers have stay open extra hours and employ additional staff to accommodate demand for generators and clean-up supplies, and restaurants and convenience stores see additional business.

So when you see pictures of a flattened town, don’t assume that their credit has been destroyed along with the structures. As long as the residents remain, and remain employed, bonds issued by a town should be sound. Many homeowners are insured, and reconstruction often leaves things better than they were before.

Of course, if the destruction is so bad that taxpayers leave and don’t come back, that’s a different story. But such outcomes are rare. For the most part, natural disasters don’t create credit disasters.

Douglas R. Tengdin, CFA
Chief Investment Officer
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