Die Katrina Aktien Die Profiteure und Verlierer

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NEW YORK - Katrina's wave of destruction appears to be having only ripple effects on U.S. equity markets. On Monday, Aug. 29, the day the storm roiled New Orleans and the central Gulf Coast region, the three major U.S. equity indexes posted gains. More telling, in our opinion, was that all ten sectors in the S&P 500 recorded advances, and 80% of the 119 industries in the S&P 500 rose on the day. Talk about discounting possible future events!

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Now that it is several days beyond Katrina's initial touchdown on U.S. soil, the estimates and prognostications of future fallout are flying faster than an unsecured patio umbrella. Yet, as seen in the table below, the S&P 500 and all ten sectors are still higher since the storm hit. What's more, nearly three of four subindustry indices remain in positive territory, with energy, materials technology and construction-related industrial companies leading the way; while insurance, retail, lodging/gaming and transportation companies are bearing the brunt of the declines.

Investors and the media have been posing fairly similar questions regarding the fallout from Katrina on the U.S. economy, market and sectors. So I thought I would try to match some of the more frequently asked questions with what we know so far.

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Where will oil prices go from here?

While oil prices currently remain in the upper $60 per barrel area, they have come off of their record highs above $70, since preliminary indications are that a majority of oil and gas rigs, production platforms, refineries and pipelines have sustained minimal damage beyond flooding and loss of power. Early estimates call for operations to resume within two to four weeks. As a result, S&P and Global Insights project that oil prices will trade as high as $70 to $75 over the near term, but close the year near our pre-storm target of around $62.

We estimate that oil prices will decline to $52 per barrel by year-end 2006.

Is a recession on the horizon?

Even though hurricanes are a national media event, their economic impact is usually regional. Indeed, during the past 100 years, hurricanes have typically increased future economic growth as the localities affected by the storm repair and rebuild. The Insurance Information Institute estimates that insurance claims from Hurricane Katrina could top $25 billion. When including other factors, such as roads, bridges and other structures, S&P believes this figure could easily be doubled. As a result, S&P Economics reduced its third-quarter 2005 real gross domestic product forecast by 50 basis points, but believes this near-term subtraction will be more than made up in the three quarters thereafter. While S&P Economics has increased the likelihood of a recession hitting the U.S. in the coming 12 to 18 months, we continue to believe that real GDP growth of 3.0% to 3.5% is more likely.

What about the Fed?

A sideline benefit to equity markets has been the decline in the yield on the ten-year Treasury-note, as a result of a flight to safety and the possible ending of the Fed's rate-tightening program earlier than expected, in our opinion. We think some investors now believe the Fed will raise short-term rates only one or two more times--stopping at between 3.75% and 4%--in order to offer additional economic stimulus as well as not force an inverted yield curve. S&P is maintaining its year-end 2005 fed funds and ten-year note yield targets of 4.25% and 4.75%, respectively, as we believe above-trend economic growth will continue.

Will the effects of Katrina trigger a new bear market in equities?

History says that hurricanes don't typically trigger bear markets or even market declines. Hurricanes have had an uneven track record of affecting stock prices, in our opinion, as equities are more likely driven by wider-reaching national events than localized natural disasters. Of course there is no guarantee that history will repeat itself.

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The accompanying table lists the 13 costliest hurricanes in the past 100 years in 2004 dollars, along with the price change for the S&P 500, one, six and 12 months after the event. I wanted to show the average market movements following the top ten hurricanes, but since four of them occurred within a month of each other--and I did not want to skew the averages with repetitive forward performances--I included three more to come up with an even ten observations.

Isn't this hurricane different, since it affected energy output?

That could be the main wild card in our forecast. Should the damage to production platforms, refineries and distribution channels be greater than estimated by fly-bys and initial inspections, the already precariously positioned supply/demand energy balance could be tipped more toward shortages than currently forecasted.

Unfortunately, it is too soon to tell for sure.

Which sectors will be helped or hurt?

We expect the property-casualty insurance subindustry to remain under pressure until there is more clarity on insured losses from Katrina. Although the insured losses could approach a record $25 billion, the property-casualty subindustry has a capital base of nearly $400 billion. Our concern is the impact to commercial insurers from the disruption in oil production and the general economic disruption from the storm. Our top pick remains Allstate (nyse: ALL - news - people ), primarily a personal lines insurer.

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Others in the subindustry include Hartford Financial Services (nyse: HIGPRA - news - people ), Chubb (nyse: CB - news - people ), American International Group (nyse: AIG - news - people ), Safeco (nasdaq: SAFC - news - people ), and St. Paul Travelers Cos. (nyse: STA - news - people ).

Stocks in the construction and engineering subindustry are trading higher, which we believe is a knee-jerk reaction. Jacobs Engineering (nyse: JEC - news - people ), a provider of refining and building infrastructure services is up sharply. Other rising stocks include Fluor (nyse: FLR - news - people ), URS (nyse: URS - news - people ) and Shaw (nyse: SGR - news - people ). We reiterate our sell opinion on Shaw, despite its 15% gain on news of talks with FEMA on cleanup efforts. We see softness in its environmental work and in our valuation metrics of the company.