Wildfires have been raging through California for more than a week, and with each passing day, the estimated damage continues to rise from $50 billion to $200 billion. At least 153,000 Los Angeles residents have been evacuated, and hundreds, if not thousands, have lost their homes.     

This raises a legitimate question: how will this natural catastrophe affect the country's economy and labor market, and could it trigger major crashes in the S&P 500, Nasdaq, etc., or worse, a full-blown crisis?      

What is happening in Southern California is a tragic catastrophe, but it is too early to say it will cause major problems for the country. On the contrary, domestic consumption could increase depending on the magnitude of the disaster and the speed at which insurance and federal aid are paid out.     

The risk, however, is that prices could skyrocket, precisely what the Fed is trying to avoid at all costs. Let's not forget that during the December meeting, the Fed revised its rate cut forecast from four to two. Now, the market has even reduced the probability of rate cuts to zero.     

The worsening outlook was due to good labor market data for December: unemployment fell to 4.1% (below the 4.2% expected), and non-farm payrolls increased by 256,000 jobs, well above the 164,000 expected. Subsequently, instead of rising, the markets viewed this new information with pessimism.     

The reason for such a counterintuitive reaction is that when solid economic data is released, whether it is a robust labor market or growth in business activity, the Fed takes it as an indication that interest rates can remain high (and with them, debt servicing costs) as the economy is doing well.    

So, bulls hope this week's December inflation data will be lower than expected, as was the case with the figures released after the last Fed meeting. The catch is that, even if the numbers do not disappoint this time, they could be affected in January by the rebound in energy prices.   

The bottom line is that, in the broader context of the country, what is happening in California should not lead to an economic crisis. The main risk is that the government will have to allocate additional funds from the federal budget to deal with the negative consequences, which could trigger inflation. 

Insurance companies typically reinsure against such disasters, so mass bankruptcies in the sector are unlikely. This is why the SPDR S&P Insurance ETF has not significantly dropped since January 7th.