Katrina Forces Investors To Rethink Fall Strategies

WSJ.com - E.S. BROWNING : "Hurricane Katrina is forcing professional investors to rethink their strategies for the fall.

The week after Labor Day is when the pros come back from vacation and adjust their portfolios for the rest of the year. Until the beginning of last week, they thought they had a pretty strong grasp on what mattered for stocks -- the Federal Reserve, oil prices and the ability of corporate earnings to keep racing ahead.

Now, those calculations are back in doubt. Some investors believe Katrina will hold the stock market back, as rising oil prices and shipping disruptions hurt corporate profits and economic growth. Others think Katrina actually could help stocks in the longer term, since the rebuilding effort eventually should spur consumption and investment in new equipment. They also see the Fed, at least temporarily, supporting the economy by suspending its campaign of interest-rate increases.

"This is changing a lot of the thought patterns that I had 30 days ago," says William Dwyer, president of MTB Investment Advisors in Baltimore, which manages more than $11.5 billion in stocks, bonds and money-market investments. He believes that, after the initial economic hit, the rebuilding actually could extend the life of both the economic recovery and the bull market. Mr. Dwyer sees the rebuilding adding $50 billion to the economy in the next six months, close to 0.5% of the economy's total value.

Such optimistic views, however, are hardly universal.

"The negative consequences resulting from Katrina, whether they are economic or political, may hang around a bit longer and cut a bit deeper than is now anticipated," says Gordon Fowler, chief investment officer at Glenmede Trust in Philadelphia, in a report to clients. Last month he had suggested that clients increase their stock holdings, but now he is urging them to put stock-purchase plans on hold.

Pessimists seemed to be in the minority last week. Despite some ups and downs, the Dow Jones Industrial Average finished the week ahead 50.08 points, or 0.5%, at 10447.37, even with a decline of 12.26 points on Friday, ahead of yesterday's holiday. That ended a two-week slide, though the average still is down 3.1% for the year.

The Nasdaq Composite Index added 20.30 points, or 1%, to close at 2141.07 for the week but is still off 1.6% year-to-date; Nasdaq fell 6.83 points Friday. Oil and gasoline futures also fell on Friday, amid reports that deliveries were picking up from Gulf Coast pipelines and that the International Energy Agency was freeing up supplies.

"The market consensus is that the Fed is much nearer an end" to its rate increases than it was before the hurricane hit, says Chris Conkey, chief investment officer at Evergreen Investments, Wachovia's money-management unit. "I don't see high energy prices as being a significant impact on the economy, and I don't see this causing a recession," he says.

Mr. Conkey sees the broad market rising 6% to 8% by the end of the year, with energy stocks, financial stocks and industrial stocks in the lead. But he sees retailers suffering, even high-end retailers, as gasoline prices hurt wealthier consumers.

Mr. Dwyer of MTB Investment Advisors sees a number of beneficiaries of the rebuilding efforts, such as oil-service companies, pipe manufacturers, waste-management companies, makers of electric systems and producers of prefab housing. He also likes industrial companies in general, on the theory that a stronger economy will help them. He is pulling back from stocks of restaurants and other leisure companies, as well as retailers selling back-to-school items. "The consumer will put more into gas, and will spend less on dinner and Disney World," he says.

Henry Herrmann, chief executive at mutual-fund group Waddell & Reed in Overland Park, Kan., thinks that could be too optimistic. Katrina's impact on energy supplies will make it "different than other hurricanes," he says. "The energy-price problem is going to be around for a while. I don't think it is just a flash in the pan." With the economy held back, he sees the broad market making little progress this year -- though he sees individual stock groups moving sharply.

Oil producers and related stocks should keep rising along with oil prices, he says. Like many who are worried about the hurricane's impact, he stresses that he isn't forecasting a recession. But he does expect a slowdown in growth, meaning "you need to be getting out of the places that look like they are highly exposed to a big increase in the price of energy." Manufacturers and makers of chemicals and plastics will be facing both softer demand and higher costs for fuel and raw materials. He thinks big financial firms also could be squeezed, along with makers of big-ticket consumer items such as appliances and cars. Health-care stocks, less exposed to short-term demand swings, could be safer, he says.

Goldman Sachs economists warned Friday that "the hit to growth, expected to last through year end, will be larger than from other disasters," though they added that the subsequent rebound also could be larger than usual.

But Bridgewater Associates, which manages $128 billion in Westport, Conn., took the opposite view. "While the hurricane will have some modest economic impact, it will not materially affect how this cycle plays out," Bridgewater wrote in its own report. With growth still strong and inflation still rising, those who expect the Fed to stop raising rates could be disappointed, it said.

The one point on which almost no one disagreed was that oil prices are likely to continue rising.

Unlike past oil-price increases, which were due to wars or external price manipulation, this price increase is being caused by supply and demand, and it could be more lasting. "Forward prices of oil indicate that the new, higher price of oil is here to stay," Bridgewater wrote."