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Weathering Katrina on Wall Street

By Sam Stovall Katrina's wave of destruction appears to be causing only ripple effects on U.S. equity markets. On Monday, Aug. 29, the day the hurricane roiled New Orleans and the central Gulf Coast region, the three major U.S. equity indexes posted gains.

More telling, in Standard &Poor's opinion, was that all 10 sectors in the S&P 500-stock index recorded advances, and 80% of the 119 industries in the S&P 500 rose on the day. Talk about discounting possible future events...

S&P 500 Sector

% Chg. 8/29/05-8/31/05



Health Care




Information Technology


S&P 500 (VALUE)


S&P 500


S&P 500 (GROWTH)


Telecommunication Services




Consumer Staples






Consumer Discretionary


SPECULATION FLYING. As seen in the table above, the S&P 500 and all 10 sectors moved higher in the days following Katrina's landfall. What's more, nearly three-quarters of the subindustry indexes remained 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.

Now that it's several days beyond Katrina's tumultuous landfall, the estimates and prognostications of the storm's future fallout are flying fast and furious. Investors and the media have been posing fairly similar queries regarding the impact on the 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.

Where will oil prices go from here?

While crude currently remains in the upper $60-per-barrel zone, it price has come off of the record highs above $70, because preliminary indications suggest 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 energy-forecasting outfit Global Insights project that oil prices will trade as high as $70 to $75 over the near term -- but then close the year near our pre-storm target of around $62. We estimate that oil prices will decline to $52 per barrel by yearend 2006.

Is a U.S. recession on the horizon?

Even though hurricanes qualify as national media events, their economic impact is usually regional. Indeed, during the last 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 such factors as roads, bridges, and other structures, S&P believes this figure could easily double.

As a result, S&P Economics reduced its third-quarter 2005 real GDP forecast by 50 basis points -- but believes the three quarters thereafter will more than make up for this near-term subtraction. 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% to 3.5% is more likely (for other estimates, see "Katrina's "Unique" Economic Impact").

What about the Fed?

A sideline benefit to equity markets has been the decline in the yield on the 10-year Treasury note, as a result of a flight to safety by investors and the possible ending of the Federal Reserve'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 and avoid an inverted yield curve. S&P is maintaining its yearend 2005 Fed funds and 10-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 hurricanes don't typically lead to 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's no guarantee that history will repeat itself.

Isn't this hurricane different, because 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 flybys and initial inspections, the already precariously positioned supply/demand energy balance could tip more toward shortages than currently forecasted. Unfortunately, it's too soon to tell for sure.

Which sectors will be helped or hurt?

Like Captain Renault in Casablanca, right now we can round up "the usual suspects" by identifying which industries will likely benefit from, or be hurt by, these events.

We think equity-price action in the immediate aftermath of the storm could give a very good indication of which groups will likely remain under pressure or be buoyed by possible outcomes. Adding S&P's 12-month investment outlooks, in the form of average S&P STARS rankings by industry index, also helps identify possible winners and losers in the coming months.

Possible Winners


% Chg. 8/29/05-8/31/05


Oil & Gas Refining & Marketing



Oil & Gas Equipment & Services



Oil & Gas Exploration & Production



Integrated Oil & Gas



Building Products



Trading Companies & Distributors



Water Utilities






Semiconductor Equipment



Managed Health Care



Possible Losers


% Chg. 8/29/05-8/31/05


Photographic Products






Hotels, Resorts & Cruise Lines



Department Stores



Auto Parts & Equipment



Property & Casualty Insurance



Casinos & Gaming



Industrial Gases



Homefurnishing Retail



health-care Facilities




S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:










Above Average


In Reorganization




Not Ranked


Below Average

S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.

Required Disclosures

In the U.S.

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.


As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.


This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.

Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations.

Stovall is chief investment strategist for Standard & Poor's

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