Outlook for stocks in the aftermath of Katrina
Hurricane Katrina has been described as the worst natural disaster in the history of the United States. Whether the consequences will be disastrous for equity investors in general is another matter.
Katrina hit the shores of the Gulf of Mexico on 29 August, hitting the city of New Orleans particularly hard. The death toll has not been finalised. Earlier fears of a total of 10,000 dead have been scaled back as the official death toll remains in the hundreds. Nevertheless, the amount of destruction is clearly immense. Estimates of total damage caused by the hurricane are now over US$100 billion, while estimates of the impact on the US government budget are approaching US$200 billion.
Such a scale of destruction will obviously have an impact on US GDP growth, especially in the second half of the year. In addition to its generally destructive effects in Louisiana and neighbouring states, the hurricane has hit oil and gasoline production from the Gulf of Mexico. Consumer demand is expected to be crimped by the resulting higher energy prices, not to mention the negative psychology in the wake of the hurricane's destruction.
Last week, Treasury Secretary John Snow told reporters on Tuesday after a meeting with bank and financial regulators that the GDP growth rate could be reduced by "a half a percent or so". The Congressional Budget Office estimates a reduction of between 0.5 and 1 percentage point in GDP growth and a loss of 400,000 jobs.
A recent Bloomberg survey also found economists reducing their GDP growth forecasts and raising inflation forecasts for the second half of the year. The economy is now expected to grow at a 3.6 percent annual rate in the third quarter instead of the 4.1 percent forecasted a month ago, while the consumer price index is forecast to rise at a 3.5 percent rate from a year earlier compared to last month's forecast of 3 percent. For the fourth-quarter, the growth forecast has been reduced to 3.1 percent from the previous forecast of 3.5 percent, while consumer prices are forecast to rise 3.2 percent, up from the earlier estimate of 2.9 percent.
On the other hand, the rebuilding that is planned for the hurricane-hit region is likely to boost the economy in 2006. Whether all this spending would cancel the negative impact to GDP in 2005 is the big question.
Equity investors, however, had another reason to be hopeful in the aftermath of the hurricane -- a possible moderation in the Federal Reserve's tightening campaign. For example, Peter Brimelow, in a MarketWatch article on 5 September, cited Michael Burke of Investor's Intelligence as saying that the slowing economy means that "Fed rate hikes should no longer be needed", and low rates would provide support for the market. Indeed, bond yields fell in the immediate aftermath of the hurricane, the 10-year Treasury yield falling from about 4.2 percent just before the hurricane hit to a low of about 4 percent within a week.
However, recent robust economic data -- and perhaps more importantly, remarks by a couple of Federal Reserve presidents that inflation is a concern -- has diminished such hopes. The 10-year yield has backed up to over 4.1 percent.
As for consumer spending, retail sales data reported in the week following the hurricane have provided no clear indication of any change in trend.
So while among listed companies there are undoubtedly some that are likely to be negatively affected by the disaster and some that may benefit from it, at the moment, for the market as a whole, it may be too early to say whether the fundamentals for equities have changed much -- for better or worse -- as a result of the hurricane.
However, Richard Russell, editor of the Dow Theory Letters and, like Burke, much followed by MarketWatch columnists, recently provided technical reasons for optimism.
In an article on 7 September, Mark Hulbert wrote that Russell has turned "totally neutral on the stock market -- at least as to the secondary trend". The reasons: A new all-time high on the Dow Jones Utility Average and a potential upside breakout for the Standard & Poor's 500. Hulbert quoted Russell on the latter as follows: "The chart shows that if the S&P rises to 1,250, this would be a powerful upside breakout, with a large upside target hundreds of points higher." The S&P 500 closed last week at 1,241.48.
What may also be noteworthy is that Russell -- and Burke for that matter -- are bearish for the longer term. When bears -- especially ones with relatively good track records as Russell and Burke, as claimed by Hulbert and Brimelow -- are prepared to put aside their bearishness and acknowledge significant upside potential, even if only for the short term, I think investors should at least sit up and take notice.
And Hulbert has more to reinforce the short-term bullish case.
In an earlier article, Hulbert pointed out that the Hulbert Stock Newsletter Sentiment Index (HSNSI), an index that he uses to gauge the average recommended stock market exposure among a subset of short-term market timing newsletters, stood at 27.4 percent as of last Monday's close. This seemed unusually low to him; on 10 August, it had been at 52.2 percent.
Furthermore, the Hulbert NASDAQ Newsletter Sentiment Index (HNNSI), a similar measure for the NASDAQ, stood at minus 7.7 percent, which means that the average NASDAQ market timer is now net short the market. On 10 August, it had been in positive territory at 30.8 percent.
To Hulbert, "sentiment moves like the ones we've seen over the last month have more often than not been the precursors to rallies than declines".
On the other hand, investors who focus exclusively on the long term might prefer to ignore such short-term moves. In fact, for such investors, even Katrina may have little relevance. On this fourth anniversary of the 9/11 terrorist strike, it is probably worth remembering that over the long term, one-off disasters seldom have much long-term effects on stock markets as a whole. Hurricane Katrina is likely to be no exception.
Katrina hit the shores of the Gulf of Mexico on 29 August, hitting the city of New Orleans particularly hard. The death toll has not been finalised. Earlier fears of a total of 10,000 dead have been scaled back as the official death toll remains in the hundreds. Nevertheless, the amount of destruction is clearly immense. Estimates of total damage caused by the hurricane are now over US$100 billion, while estimates of the impact on the US government budget are approaching US$200 billion.
Such a scale of destruction will obviously have an impact on US GDP growth, especially in the second half of the year. In addition to its generally destructive effects in Louisiana and neighbouring states, the hurricane has hit oil and gasoline production from the Gulf of Mexico. Consumer demand is expected to be crimped by the resulting higher energy prices, not to mention the negative psychology in the wake of the hurricane's destruction.
Last week, Treasury Secretary John Snow told reporters on Tuesday after a meeting with bank and financial regulators that the GDP growth rate could be reduced by "a half a percent or so". The Congressional Budget Office estimates a reduction of between 0.5 and 1 percentage point in GDP growth and a loss of 400,000 jobs.
A recent Bloomberg survey also found economists reducing their GDP growth forecasts and raising inflation forecasts for the second half of the year. The economy is now expected to grow at a 3.6 percent annual rate in the third quarter instead of the 4.1 percent forecasted a month ago, while the consumer price index is forecast to rise at a 3.5 percent rate from a year earlier compared to last month's forecast of 3 percent. For the fourth-quarter, the growth forecast has been reduced to 3.1 percent from the previous forecast of 3.5 percent, while consumer prices are forecast to rise 3.2 percent, up from the earlier estimate of 2.9 percent.
On the other hand, the rebuilding that is planned for the hurricane-hit region is likely to boost the economy in 2006. Whether all this spending would cancel the negative impact to GDP in 2005 is the big question.
Equity investors, however, had another reason to be hopeful in the aftermath of the hurricane -- a possible moderation in the Federal Reserve's tightening campaign. For example, Peter Brimelow, in a MarketWatch article on 5 September, cited Michael Burke of Investor's Intelligence as saying that the slowing economy means that "Fed rate hikes should no longer be needed", and low rates would provide support for the market. Indeed, bond yields fell in the immediate aftermath of the hurricane, the 10-year Treasury yield falling from about 4.2 percent just before the hurricane hit to a low of about 4 percent within a week.
However, recent robust economic data -- and perhaps more importantly, remarks by a couple of Federal Reserve presidents that inflation is a concern -- has diminished such hopes. The 10-year yield has backed up to over 4.1 percent.
As for consumer spending, retail sales data reported in the week following the hurricane have provided no clear indication of any change in trend.
So while among listed companies there are undoubtedly some that are likely to be negatively affected by the disaster and some that may benefit from it, at the moment, for the market as a whole, it may be too early to say whether the fundamentals for equities have changed much -- for better or worse -- as a result of the hurricane.
However, Richard Russell, editor of the Dow Theory Letters and, like Burke, much followed by MarketWatch columnists, recently provided technical reasons for optimism.
In an article on 7 September, Mark Hulbert wrote that Russell has turned "totally neutral on the stock market -- at least as to the secondary trend". The reasons: A new all-time high on the Dow Jones Utility Average and a potential upside breakout for the Standard & Poor's 500. Hulbert quoted Russell on the latter as follows: "The chart shows that if the S&P rises to 1,250, this would be a powerful upside breakout, with a large upside target hundreds of points higher." The S&P 500 closed last week at 1,241.48.
What may also be noteworthy is that Russell -- and Burke for that matter -- are bearish for the longer term. When bears -- especially ones with relatively good track records as Russell and Burke, as claimed by Hulbert and Brimelow -- are prepared to put aside their bearishness and acknowledge significant upside potential, even if only for the short term, I think investors should at least sit up and take notice.
And Hulbert has more to reinforce the short-term bullish case.
In an earlier article, Hulbert pointed out that the Hulbert Stock Newsletter Sentiment Index (HSNSI), an index that he uses to gauge the average recommended stock market exposure among a subset of short-term market timing newsletters, stood at 27.4 percent as of last Monday's close. This seemed unusually low to him; on 10 August, it had been at 52.2 percent.
Furthermore, the Hulbert NASDAQ Newsletter Sentiment Index (HNNSI), a similar measure for the NASDAQ, stood at minus 7.7 percent, which means that the average NASDAQ market timer is now net short the market. On 10 August, it had been in positive territory at 30.8 percent.
To Hulbert, "sentiment moves like the ones we've seen over the last month have more often than not been the precursors to rallies than declines".
On the other hand, investors who focus exclusively on the long term might prefer to ignore such short-term moves. In fact, for such investors, even Katrina may have little relevance. On this fourth anniversary of the 9/11 terrorist strike, it is probably worth remembering that over the long term, one-off disasters seldom have much long-term effects on stock markets as a whole. Hurricane Katrina is likely to be no exception.
