Extreme weather may douse sizzling stock market, warns Schwab strategist

Our call of the day from Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co., advises investors to start putting the weather at the front of their investment minds, especially if, in coming quarters, El Niño threatens economic disruption.

The “Little Boy” weather phenomenon stretches back to the 1600s, when South American fishermen noted warming in the Pacific Ocean. Such heating can shift temperature and weather patterns, lasting from months to years. La Niña has the opposite effect.

As Kleintop notes, the World Meteorological Organization has predicted a 90% chance of an El Niño event in the second half of this year. Already in 2023 we’ve had “off the charts” forest fires in Canada sending smoke south, deadly flash flooding on the East Coast and heavy rainfall in Chile that has disrupted its copper-mining industry.

In Europe, low water levels for the Rhine and Danube rivers have made it hard to move barges of industrial goods and grains (read about Germany’s troubles last year), while the Rhone is now too warm to cool French nuclear reactors, leading to power outages, said Kleintop.

“If these impacts continue to threaten agriculture, energy, and lives, or worsen — as forecasters expect — the economic impact could be significant for both inflation and economic activity,” said Kleintop.

Many countries have seen cooling core inflation rates, but extreme weather could send prices up again in the coming months, he said. For example, low water levels in reservoirs could drive up energy inflation via gas and coal prices due to reduced hydropower availability, while increased air-conditioning demand would drive up energy demand.

If barges can’t get down rivers, the transport burden falls to trucking and rails, driving up freight and fuel costs. And drought conditions could weigh on food prices, with rice
RRU23,
+1.40%
already at its highest level in more than two years as Vietnam and Thailand have been stockpiling, said Kleintop.

This all feeds into central banks needing to keep interest rates higher for longer if high food prices persist, the strategist said. That’s most notable in India, where food makes up 50% of inflation — it’s closer to 20% in China and 13% in the U.S.

Global food prices, as his chart shows, are down from last year’s highs but remain elevated as El Niño effects may play out in the months ahead:

Read: El Niño has potential to disrupt the outlook for sugar, rice and other consumer staples

Investors must also remember how geopolitical unrest can flare up when food prices surge, such as in the Arab Spring of 2011. And in emerging- and frontier-market countries, food tends to make up a bigger chunk of consumer spending, he said.

As for markets, Kleintop says history has shown rising volatility linked to weather events. The years 2015 and 2016 saw a 13% selloff in the MSCI world index during the strongest El Niño ever recorded, though other factors were also involved, and it was short-lived. What investors could see a repeat of is volatility hitting sectors related to agriculture and energy — materials and energy sectors led that 2015–16 stock slump, he said.

Read: As the Dow hits 2023 high, one of the oldest stock-market forecasting tools is making a comeback

The markets

Stocks
DJIA,
+1.06%

SPX,
+0.71%

COMP,
+0.76%
are mixed after retail-sales data, with bond yields
TMUBMUSD02Y,
4.763%

TMUBMUSD10Y,
3.790%
dipping, oil
CL.1,
+2.21%
and the dollar
DXY,
+0.11%
higher.

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The buzz

Bank of America
BAC,
+4.42%
stock is up after forecast-beating earnings and revenue, and Lockheed Martin
LMT,
-3.04%
has lifted guidance, Charles Schwab
SCHW,
+12.57%
reported an earnings fall, but still beat consensus, while Morgan Stanley
MS,
+6.45%
and BNY Mellon
BK,
+4.11%
topped forecasts.

Retail sales for June grew just 0.2% versus a forecast of 0.5%. Also on deck: industrial production at 9:15 a.m., followed by business inventories and a home-builder confidence reading at 10 a.m., alongside a speech from Fed Vice Chair Michael Barr on fair lending practices.

Goldman Sachs’s chief economist sees a lesser chance of a U.S. recession and has brushed aside yield curve worries.

Cathie Wood’s ARK funds dumped $26 million more shares of Coinbase
COIN,
-0.91%
and $13 million more of Tesla
TSLA,
+1.02%.

Masimo  
MASI,
-20.00%
stock is dropping sharply after the hospital-equipment maker’s disappointing forecast for sales.

A day after disappointing growth data, China officials announced measures to boost domestic consumption, but fell short of major stimulus markets have been demanding, as Wall Street gloom over the country builds.

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The chart

Steve Englander, head of North American macro strategy at Standard Chartered, says income data suggests actual GDP is overstating activity. Among the charts he offers as evidence for this view is this one showing a big divergence in GDP measured by income and GDP conventionally gauged through spending, even though data only runs through the first quarter of this year.

“The only other time when a comparable gap occurred was in the run-up to the 2008 recession; there was a somewhat more modest gap during the approach to the 1990 downturn,” said Englander. If his theory holds up, that would be the “next shoe to drop for the dollar,” as it would mark a downward shift in interest rate expectations, he says.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

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