Weather-Induced Volatility Threatens Stock Market, Warns Schwab Strategist

Extreme weather conditions could have a chilling effect on the sizzling stock market, according to a warning issued by Jeffrey Kleintop, the chief global investment strategist at Charles Schwab & Co. Kleintop advises investors to prioritize weather patterns in their investment decisions, especially if El Niño poses a threat of economic disruption in the coming quarters. The World Meteorological Organization has predicted a 90% chance of an El Niño event occurring in the second half of this year, and recent weather events, including forest fires, flash flooding, and heavy rainfall, have already taken a toll on various industries worldwide.

Kleintop highlights the potential economic impact of extreme weather events on agriculture, energy, and general economic activity. Disruptions to the supply chain caused by low water levels in rivers, such as the Rhine and Danube, have impeded the transportation of goods and increased freight and fuel costs. Additionally, drought conditions may lead to higher food prices, with rice prices already at their highest level in over two years due to stockpiling by Vietnam and Thailand. If these challenges persist, central banks may need to maintain higher interest rates to counter inflationary pressures, particularly in countries like India where food comprises a significant portion of the inflation rate.

Kleintop draws attention to the historical correlation between weather events and market volatility. The strongest El Niño ever recorded, which occurred during 2015-16, coincided with a 13% sell-off in the MSCI world index. While other factors were involved, Kleintop suggests that a similar pattern could emerge, with volatility impacting sectors related to agriculture and energy. During the previous El Niño episode, the materials and energy sectors experienced significant declines. Investors are advised to remain vigilant and factor in the potential impact of weather-related events on specific industries and market performance.