The first four months of 2024 have been the hottest in 175 years, but the worst could be yet to come. Meteorologists predict another sweltering summer in Europe and the United States, which could set new temperature records.
When discussing the causes, some attribute the new heatwaves to continued high CO2 emissions into the atmosphere, while others point to natural climate variability. However, that is a topic for another time and among scientists.
Instead, let's dive into how climate affects financial markets and the global economy.
The effects are mostly negative, but as harsh as it may sound, investors can always benefit from this. For example, if weather forecasts come true, demand for electricity, especially for air conditioning, will increase.
Thus, demand for raw materials, including natural gas and oil, could be boosted. Droughts could increase the prices of major crops such as wheat and soybeans. Forest fires could push up timber prices, and the drying up of waterways could raise transport costs.
And there's more: the oceans, at record high temperatures, threaten to trigger “explosive” tropical cyclone activity. La Niña will intensify hurricanes in the Atlantic and trigger droughts in the western and southern United States.
Even nuclear power cannot help. Many reactors are cooled in rivers, and when water temperatures get too high, environmental regulations aimed at protecting aquatic life can lead to a temporary shutdown, at least in Europe.
Finally, the world could face another supply chain bottleneck. The shipping industry is already facing challenges due to events in the Red Sea, such as the Houthi attacks, which have increased logistics costs and transit times.
Assuming the worst-case scenario, what happens next?
In addition to damaging nature and, in some cases, infrastructure, it could raise the prices of other goods that depend on these raw materials, which are essentially everything from household goods to food in the fridge.
This, in turn, could force central banks to reconsider their plans to cut interest rates. This will not be good news for the S&P 500, obviously, and especially for highly leveraged companies. It could increase bankruptcies and volatility in general.
Perhaps the green energy investment program will be resumed in this context. But all this is just speculation; reality could be very different. So, before making any decisions about the market, be sure to do your research.