From Ken Little,
Your Guide to Stocks.
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Hurricane Katrina’s impact on the stock market and the economy will play out over time, but its devastating punch to the nation’s Gulf Coast remains a painful wound.

Katrina is the most costly storm in U.S. history with an expected economic impact to exceed $100 billion. The human toll is still being counted, but it expected to be in the thousands.

If the stock market and the economy falter under Katrina’s impact, then the storm will expand its list of victims well beyond the Southeast.

Although some are already using the “R” word (recession), it seems way too early for that type of panic. However, stock investors should be prepared for some real problems:

Higher Energy Prices

We’ve already seen what has happened with the price of gasoline and diesel thanks to Katrina’s damaging refineries, pipelines and port facilities in New Orleans and along the Gulf Coast. However, that’s only part of the story.

Higher energy costs spill over into just about every product you use either directly, because petrol-chemicals are used in making the product, or indirectly, because of higher shipping costs.

Home heating costs are expected to skyrocket this winter thanks to the storm and an already tight market. After Labor Day, some refineries switch from making gasoline to producing home heating oil. With higher crude prices, shorter supplies, and more demand, it is almost certain that home heating costs will rise substantially this year.

Consumer Spending

As the price of energy continues to climb, it takes a bigger bite out of consumers’ budgets. This may lead to scaling back in consumer spending. Since consumer spending accounts for over two-thirds of our economy, this could put the brakes on the economy in coming quarters.

A significant and sustained slow down in consumer spending is one of the triggers that could push the economy into a recession. Here’s why retail sales are important.

Consumers are likely to postpone larger, discretionary spending as more of the take home pay goes for gasoline and home heating costs in addition to rising cost across the board.

Defensive stocks (non-cyclical) may see a rise in coming months as the economy absorbs the after-shocks from Katrina. Read this article for more information on cyclical and non-cyclical stocks.

Real Estate

Once rebuilding begins, there will be material shortages, which will drive up the cost of new-home construction. Along with that, construction crews will likely be drawn to the storm area where work can continue virtually year-round, meaning higher labor costs for the rest of the country.

Interest Rates

The Fed Reserve Board’s Open Market Committee is scheduled to meet on September 20. Before Katrina, the market assumed another one-quarter point interest rate hike was almost a sure thing.

Now, many analysts are suggesting the Fed might not raise interest rates this meeting because the storm’s full impact is not yet known. Better safe than sorry.

If the storm damaged the economy more than anticipated, an interest rate hike could plunge the economy into a recession. If the economy doesn’t stumble, the Fed can resume its rate hikes at their next meeting.

Corporate Earnings

Corporations, like consumers, will see their budgets battered by rising energy costs. Some will be able to pass the increases (or some of the increases) on the consumers, but few will find it easy to cover all the additional expenses and still stay competitive.

The travel industry, such as airlines, hotels, restaurants, and such may feel the pinch as consumers cut back spending, while expenses rise due to high energy costs. The same is true for discount retailers and other non-necessity spending.

Energy and building material companies stand to gain the most in coming months for obvious reasons.

This article discusses the importance of earnings to investors.

Conclusion

Stock investors should note that the long-term damage to the economy from Katrina might be more psychological than actual. Once again, we have been reminded that things can and do happen that are out of our control.

The immediate problem is getting the refineries, pipelines and port facilities on the Gulf Coast repaired and operating again. When that happens, much of the energy spike will go away, but we need to remember that there was an energy problem before Katrina that will still be there after repairs are made.