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A skateboarder passes buildings shrouded in smoke from wildfires in Calgary, Alberta, Canada, on Wednesday, May 17, 2023. Scenes in Calgary were reminiscent of Seattle last summer and San Francisco in 2020 as wind currents blew smothering wildfire smoke into those population centers, compromising air quality. Photo: Todd Korol/Bloomberg

Portfolio > Economy & Markets

Severe Weather Could Hit Markets This Year: Schwab's Kleintop

By Dinah Wisenberg Brin

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What You Need to Know

  • Rates may need to stay higher longer in some countries if weather drives inflation, he said.
  • Food, freight and energy prices are vulnerable, Kleintop wrote.
  • North and South America have also seen weather disruptions already, he noted, citing the millions of people affected by wildfires in Canada and excessive-heat warnings in the U.S.

Intense weather associated with a predicted El Niño climate event this year could mean rough sailing for financial markets, a top Charles Schwab strategist warns.

“Weather rarely has a material impact on overall markets. But that could change in the coming quarters as the potential for extreme weather heightened by El Niño could cause significant economic disruptions,” Jeffrey Kleintop, Schwab’s chief global investment strategist, said in a post Monday; two other Schwab researchers contributed to the article.

In the El Niño phenomenon, unusual warming in the tropical Pacific Ocean surface can dramatically shift temperature and weather patterns, among other changes. The World Meteorological Organization has announced a 90% probability that such an event will develop in this year’s second half, the strategist wrote.

“Market volatility could increase if El Niño impacts accumulate. The last El Niño coincided with the market selling off 13% in 2015-2016, although other factors likely contributed to the volatility. However, the impact on the market appeared to be relatively short-lived,” he said.

“During El Niño events, sectors like agriculture and energy typically experience increased volatility due to weather patterns impacting crop production and energy consumption,” the strategist explained. “The El Niño event in 2015 was one of the strongest on record, and lead to significant weather disruptions. Unsurprisingly, the material and energy sectors led the slump in the global stock markets in late 2015 and early 2016.”

Extreme weather is already causing problems around the world, Kleintop said, noting July brought “the hottest week on record for the entire planet … following the hottest June on record according to the World Meteorological Organization. Fierce heatwaves are being felt across the globe, including one last week that dried up some of Europe’s main rivers, threatening supply chains and energy supplies.”

He noted that Germany’s Rhine River fell below 100 centimeters, making it “potentially impassable for most barges carrying industrial products and coal,” and that France’s Rhone has been too warm to cool nuclear reactors that generate electricity. The Danube River at Budapest has fallen to 135 centimeters, “threatening a key Ukrainian grain transport route,” Kleintop added.

North and South America have also seen weather disruptions already, he noted, citing copper mining industry problems caused by heavy rain in Chile, the millions of people affected by wildfires in Canada and excessive-heat warnings in the U.S.

“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,” Kleintop wrote. “The inflation impacts of extreme weather are likely to be concentrated in food and energy, potentially pushing overall inflation higher in the coming months.”

Low water levels could limit hydroelectric generation, fueling energy inflation, and freight transportation costs could rise if river traffic is hobbled, he said. Drought and poor crop yields could push food prices higher, he noted, adding that rice prices are their highest in two years as importers, concerned about potential El Niño-related supply problems, have started stockpiling the grain.

“Some central banks may need to keep rates higher for longer to combat inflation should  high food prices persist, particularly in emerging and frontier markets,” Kleintop wrote.

“Extreme weather heightened by El Niño could bring market volatility, should history repeat. El Niño may result in disruptions to food production, impact the movement of goods and price of energy, cause hurricane losses for insurance companies, create geopolitical unrest, and keep rates higher for longer in some countries — particularly in emerging markets.

Weather of course is difficult to forecast — as are markets — but the potential impacts are worth considering by investors,” he said.

(Image: wildfire smoke in Calgary, Alberta; photo: Todd Korol/Bloomberg)

Dinah Wisenberg Brin

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