The post-summer trading season began today with a bit of dissent over what will, or won’t happen as an economic consequence of Hurricane Katrina. The stock market cast its vote about the morrow in clear terms with the S&P 500 surging 1.3% from Friday’s close. The bond market, by contrast, retreated slightly, pushing the yield on the 10-year Treasury up a touch to around 4.08%.
The opposing outlooks that often characterize equities and debt were on display today, and the immediate cause arguably is the pullback in energy prices. Crude oil futures in New York closed the session at a few pennies under $66, the lowest since August 23. Gasoline futures also continued tumbling, falling 6% on the day and shaving prices back to levels last seen on August 26.
Is the equity market merely relieved at the decline of energy prices, or is there something more fundamental to be had in the news of the day? One reason for optimism is the belief that the rebuilding in the wake of Katrina will more than offset the storm-related economic losses. From that narrow perspective, the optimists found reason to bid up stock prices. In fact, as one reviews the recent history of natural disasters in the U.S., the lesson is usually that the economy rebounds. As Edward Lotterman, a columnist at Knight Ridder, today writes via the News-Sentinel: “…it is important to remember that such natural disasters [as Katrina] destroy wealth but usually spur production of goods and services.”
Of course, that’s no guarantee that the shock of Katrina won’t trigger an economic slowdown this time. The magnitude of the disaster, along with the sentiment shock that may yet be broadcast around the nation, is not your garden-variety hurricane ordeal.
Getting a handle on what could go wrong, or right is a challenge as well. This was, and remains, a multi-faceted tragedy. But if there’s one gauge of what’s coming, it may very well lie with energy prices. So far, it’s too early to tell what oil and gas will do. That’s partly because the effects born of releasing oil from the Strategic Petroleum Reserve, and a similar stockpile in Europe, are still calming anxious energy traders. The longer term path of energy prices is still an open question, however, and on that score there’s reason to remain cautious. Indeed, the SPR is at best a short-term solution that’s measured in days.
As for the bigger picture, the immediate challenge remains in the Gulf of Mexico region, where roughly 10% of America’s refining capacity, or what’s left of it, resides. To be sure, U.S. oil production in the Gulf has recovered to nearly 70% of its pre-Katrina production, reports the Financial Times. How soon it gets to 100% will cast no small influence on energy markets, and therefore the public’s sentiment as to taking yet another stroll down to Wal-Mart to buy a new wardrobe, microwave oven, or food processor that doubles as a telephone. We know that Joe Sixpack was already spending like a drunken sailor, as the personal saving rate was negative in July for only the second time since the Great Depression (the other time being October 2001), relates The Washington Times. We can only guess what impact Katrina will have on such profligacy, although we can guess.
In the meantime, more politicians are anticipating a bull market in energy prices. Utah is the latest state to consider putting a cap on gasoline, according to the Deseret Morning News. Apparently not everyone shares the stock market’s optimism today that the worst has past when it comes to energy. Or, is that just politics run amuck after the fact?
Regardless, it’s not hard to find optimism on the larger question of whether there will or won’t be a recession after the current mess in the Southeast is cleaned up, the babies fed, the elderly cared for, and the dead buried. To be sure, economic growth will take a hit, but it won’t be fatal, assures the Christian Science Monitor. Katrina will trim GDP by 50 basis points in the second half of 2005, writes CS staff writer Mark Trumbull. “Then, the economy could get a Katrina stimulus, as rebuilding gets under way in earnest early in the new year.”
Perhaps, but forecasting remains an imperfect science, sunny skies or not. Compounding the usual challenge in prognosticating in the dismal science is the fact that Katrina is “an unprecedented event,” says Economy.com’s Robert Dye, who’s quoted in Trumbull’s article. Accordingly, there’s a certain degree of mystery and then some as to how the economy bounces back from the latest turmoil.
That didn’t stop equity investors from chasing hope today. Indeed, among the S&P 500 sector ETFs, consumer discretionary (Amex: XLY) led the party today, with shares jumping 1.6% vs. 1.4% for the S&P overall. Stuffed with the likes of Home Depot, Time Warner and Target, the rally in the ETF reflects the hope that all’s well now that the rebuilding in New Orleans and surrounding areas is set to begin in earnest.
Still, with the collective sigh still echoing on Wall Street it’s timely to remember that there were a few threats nipping at the stock market’s heels before the weather-induced trauma arrived. The economy may in fact face decent odds of dodging catastrophe born of Katrina, but even that would mean that the markets in short order will again be looking at the same old set of challenges. Regardless, clues about the future, for good or ill, are embedded in the energy markets. Keep your eye on those near-term futures contracts.