Hurricane Katrina cost 400,000 jobs lost, economic growth for the second half of the year trimmed by a full percentage (that’s a significant amount for this metric) and curtailed oil supplies.
What is the stock market thinking in the face of all this bad news? Shouldn’t it be sinking like a rock in the muddy Mississippi?
Bad News
The stock market often does react to bad news in a negative way. In fact, there are safeguards built into the exchanges that prevent the markets from going into a free-fall if something catastrophic happens (a president is assassinated, for example).However, what happens in most cases of bad news may be an initial strong downward pressure until the market figures out what the long-term implications of the action mean for the market and the economy.
It is important to remember that the market is always a bet on the future. How will an event affect the future of stocks – more precisely – how will it affect earnings?
Market’s Judgment
In the market’s judgment, Katrina’s impact will be contained to the immediate area around New Orleans. Once the port and oil refineries and pipelines are repaired, most of the services the city provided for the rest of the country will be back online.While energy prices will remain a problem for awhile longer, they won’t stay this high forever. There will be shortages in building materials as the rebuilding begins, which will drive up the prices of new home construction.
Food prices will rise until the port is fully functional and the barges are moving up and down the Mississippi again.
These problems may put enough pressure on the economy that the Federal Reserve Open Market Committee, which meets next week, will call a temporary halt to the interest rate hikes.
