Why El Niño Doesn’t Necessitate Portfolio Shifts

Amid the many concerns still weighing on investors this year, a new alleged storm is gathering: the weather. From Europe’s severe heatwave to a prospective super El Niño, some worry extreme weather may dampen the global economy and markets by swamping growth and reigniting inflation. While we don’t dismiss the possible disruptions, don’t overstate extreme weather’s macroeconomic implications—they look like a false fear.

As Europe baked under the sun in June, experts worry the worst is yet to come. According to the US National Ocean and Atmospheric Administration, an El Niño weather pattern formed in mid-June and has a 63% probability of developing into a very strong (or super) El Niño by yearend.^[i] Stateside, that typically means wetter, warmer winters for the West Coast and a milder Atlantic hurricane season.^[ii] Overseas, El Niño can cause extreme heat across the tropics and subtropics starting in September—which may increase drought risk in Australia, Southeast Asia, southern Africa and Central America.^[iii]

The prospect of El Niño has unsurprisingly spurred myriad negative economic outlooks—many of which cite a 2023 analysis arguing past super El Niño events (1982 – 1983 and 1997 – 1998, respectively) erased trillions of dollars of global income.[iv] Others worry extreme weather changes could roil agriculture (e.g., decimating sugar production in India and Thailand and Australian wheat output).^[v] That could supposedly lead to much higher global food prices and reheat global inflation—a classic case of “cost-push” inflation.

Misperceptions aside—cost-push inflation isn’t a thing, in our view, because true inflation is a monetary phenomenon—extreme weather events aren’t automatically bearish. Consult the history of recent natural disasters. In America, Hurricane Katrina caused over $160 billion ($270 billion in today’s dollars) in damage—the costliest hurricane on record, not to mention the tragedy of lost lives and irreparable change.^[vi] Relative to the US economy, though, Katrina’s cost was approximately 1% of US GDP and didn’t cause a recession or bear market.^[vii] Across the pond, the EU has suffered an average loss of €45 billion annually from 2020 – 2024 due to weather and climate-related events, but these didn’t drive economic downturns, either.^[viii] High-profile soft patches (e.g., Germany’s shallow recession) in 2021 and 2022 reflected an energy crunch (due to the Russia-Ukraine war) and weak external demand, not anything weather-related.

The same holds for past super El Niños. For instance, America’s early-1980s recession ended before the 1982 – 1983 El Niño reached its zenith.^[ix] That downturn was due to the Fed’s tight monetary policy—which caused money supply to slow severely and contract in late 1981—in response to the elevated inflation of the late 1970s and early 1980s.^[x] Speaking of inflation, US CPI had been slowing since its April 1980 peak of 14.6% y/y, and throughout that super El Niño, price growth decelerated markedly, from 8.3% in January 1982 to 3.8% in December 1983.^[xi] As for markets, US stocks were in a bear market from November 1980 – August 1982—ending before el peak of El Niño.^[xii] As for the 1997 – 1998 super El Niño, the US was in a decade-long expansion that featured stable inflation and the second-longest bull market in modern history—not exactly bearish to us.

This doesn’t mean El Niño caused no economic damage anywhere. The 1982 – 1983 El Niño led to heavy rains and drought and landslides in Peru, which roiled fishing, agricultural and petroleum production and contributed to a -11% decline in GDP.^[xiii] That said, Peru was also dealing with a private sector credit squeeze, difficulty accessing external capital and the Shining Path insurgency’s guerilla attacks—El Niño exacerbated the country’s problems but wasn’t the root cause.^[xiv]

Of course, we don’t dismiss the human suffering and costs due to severe weather’s disruptions. For example, El Niño can increase the likelihood of drought or flooding—a sensitive point for agricultural giant Brazil, which has experienced water shortages in recent years.^[xv] Recent heat waves on the Continent have spurred intense chatter over restrictions on—or lack of—air conditioning in both the UK and Europe. (Maybe these latest heatwaves will spur reforms and an air-con investment boom!)

From a humanitarian perspective, we are sympathetic to all those afflicted, from the farmers facing harvest uncertainty to the elderly seeking relief from the heat. But from an investment perspective, our focus is on the weather’s probable effect on stock demand and corporate profits for the foreseeable future. For one, the hardest-hit industries (e.g., agriculture) make up a small segment of the global economy—unlikely to derail broader growth. El Niño also isn’t sneaking up on anyone. Governments have started ramping up their disaster plans to mitigate disruptions to food supplies. Farmers have adjusted usual planting schedules to get ahead of a potential dry spell—as one Indonesian rice farmer put it, “Farming is about adapting and finding solutions—hopefully it works out.”^[xvi]

While El Niño raises the probability of extreme weather events, it doesn’t ensure them. For example, El Niño led to higher-than-average rainfall in Northern California in 1983 and 1998—but a relatively dry year in 1992.^[xvii] That most observers are penciling in negative outcome suggests skepticism is lingering in many corners of the market, even to this day.