Weathering the Hurricane

Although the full effects of this disaster may not be known for some time, S&P expects that damage to the economy and the stock market will be contained

By Joseph Lisanti

Energy prices have risen in the wake of Hurricane Katrina. Over the past six months, crude oil has climbed more than 30%. This would appear to be a recipe for lower stock prices. So why do we still see the S&P 500 higher by yearend?

The havoc wreaked by Katrina has caused disruptions in the energy business. That has led to higher prices at a time when many consumers were already feeling pressured by the cost of a tank of gas. Although it's too early to say definitively, we expect that the storm won't have a significant long-term effect on the energy markets.

Despite higher energy prices, consumer confidence, as measured by the Conference Board, rebounded in August after sagging in July. The survey's "present situation" index, which evaluates current business and employment conditions, is the highest it has been since the terrorist attacks four years ago.

This was a pre-Katrina survey, and we would not be surprised to see increased consumer unease now that gasoline, home heating oil, and natural gas are taking more of Americans' disposable income. But it is worth noting that consumers were relatively happy with the economy when the survey was conducted at a time of already high energy prices.

Standard & Poor's economist Beth Ann Bovino estimates that Katrina will clip at least 50 basis points (half a percentage point) from GDP growth in this quarter. But rebuilding efforts are likely to boost economic growth in coming quarters.

We don't think the Federal Reserve is tone-deaf. Should energy prices climb high enough to severely crimp economic growth, the Fed could pause for a month in its efforts to boost rates. If such a pause occurs, we estimate the fed funds rate would be 4% by the end of this year.

Our yearend target for the S&P 500 is 1270, or about 4% up from the close just before the Labor Day weekend.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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