Firestorm

Source: Ethan Swope/AP

  By Guest Blogger Doug Rowat

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Southern California continues to burn.

As of this writing, almost 100 square kms have been destroyed and dozens of lives lost. Three quarters of the Pacific Palisades area has been wiped off the map. Half of Malibu’s gone. Tens of thousands have been evacuated. Damage estimates are in the tens of billions. Rain has brought some relief, but ironically, the rain now brings the risk of flash flooding and slurries of toxic ash.

In short, it’s an apocalypse.

If Southern California were the canary in the climate-change coal mine, it’d be gasping for breath at the bottom of the cage. But, as it almost always does in response to environmental disasters, the stock market barely batted an eye. The S&P 500, in fact, has advanced 2.5% since the wildfires began three weeks ago.

But this is nothing new. The stock market usually responds to environmental disasters with a shrug. Even longer term this is true. According to the National Oceanic and Atmospheric Administration, the warmest 10 years in the entire historical record have all occurred in the past decade (2015-2024) and 2023 and 2024 were the two warmest years since global records began in 1850—and by a wide margin. Not only has the S&P 500 skyrocketed over the past two years, but its performance over the past decade has also been spectacular—13.5% annual gains. It’s fair to say that the S&P 500’s been as scorching hot as global temperatures:

The past 10 years (shaded) have been the hottest on record

Source: NOAA, Turner Investments. Chart measures difference from 1901-200 average

…but the S&P 500 has advanced 13.5% annually

Source: S&P. Total return index.

Equity markets are brutally efficient. According to the World Economic Forum and EcoWatch, extreme weather events (hurricanes, floods, heat waves, wildfires, etc.) from 2000 to 2019 have cost an estimated US$2.86 trillion, or an annual average of roughly US$143 billion. As significant as this sounds, it amounts to only a tiny fraction of the overall global economy, which, according to the IMF, currently sits at US$105 trillion.

Put in perspective, the US$143 billion annual cost of climate change amounts to less than half Colombia’s GDP (circled in green below), which, as we witnessed this week when the country instantly caved to the will of the US government, is an economic mosquito. In other words, on a global scale, annual climate-change costs are insignificant.

Annual climate-change costs amount to far less than the Columbian economy (green circle), which itself is a tiny fraction of the global economy

Source: Visual Capitalist, IMF

Equity markets also move predominantly based on corporate profit levels and as long as climate-change costs remain only a slight headwind to overall corporate earnings then investors will remain nonplussed. Below is the relationship between US market direction and US corporate profitability. Profitability that, in aggregate, stands at roughly US$3.4 trillion—a figure that dwarfs the annual climate-change expense.

It’s not climate-change costs that move markets, it’s corporate earnings

Source: FRED

Naturally, this is a cold-hearted look at the investment impact of climate change, but it’s also clear-eyed. I’m saddened by this because climate change is real and is damaging our world in dramatic, perhaps irreversible ways—just ask the residents of Los Angeles. But I’m also a portfolio manager and I know that because the costs aren’t yet severe enough to meaningfully influence corporate profits or the global economy, it will likely take years, perhaps decades, before it affects financial markets (and therefore corporate behaviour).

So, from an investment perspective, the nightmarish environmental newsflow that bombards us daily can, for now, largely be discounted.

But don’t cheer this. Instead, pity the next generation. Their world, quite literally, is going up in flames.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/02/01/firestorm/