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The devastation caused by Hurricane Katrina has shocked our nation.
One reader recently asked me what I thought the short and long-term
impact will be on the markets and how he should adjust his
portfolio. Read on to find out if you should be making changes.
My clients pay me to manage their money. They expect me to take
action to protect their hard-earned money from loss. As I woke up
Monday morning and became aware of the degree of devastation caused
by the hurricane the night before, I had to decide what actions I
would take for the tens of millions of dollars I manage.
I researched the impact other major hurricanes had on the market.
Following Andrew in the early ‘90’s and Ivan last year, the markets
had very muted reactions. In
both situations the S&P 500 dropped roughly 1% and then quickly
rebounded.
On the other hand, the markets fell over 10% within days of the
terrorist attack on September 11th, 2001. It took the nation and the
markets months, if not years, to recover.
Would the market impact of Katrina be more like that of previous
hurricanes or like the significant decline following the terrorist
attack? I judged the market could have an initial negative reaction
but would quickly recover and that the money spent rebuilding after
the storm would actually cause the market to go up.
And that’s exactly what happened. Initially, some investors reacted
out of fear and sold their stocks causing the markets to fall. Even
then the decline was muted. For the week, the markets actually ended
up and on September 6th, the markets were up well over 1%. Here’s
why.
As devastating as the hurricane was on the lives of those affected,
professional investors react based on long-term financial effects.
There’s no question that in the short-term oil supplies will be
disrupted. Transportation routes are closed and gasoline prices are
up.
The stock market doesn’t focus on short-term events. The stock
market is a leading indicator. That means that stock prices today
reflect what investors think companies will be worth 6 months down
the road.
Obviously, between now and the end of the year, there will be many
companies that won’t make as much as they thought they would. That’s
understandable and is seen as being an extraordinary event. How will
these companies and the markets do after that?
Think about what is going to take place over the next year or two.
Over 1 million people have been displaced. Many only have the
clothes on their backs. Literally hundreds of thousands of homes and
businesses have been damaged or destroyed by the storm. It’s the
same for roads and bridges, phone and power lines, cell phone
towers, trucks, cargo containers, oil rigs and shipping lanes.
These people will have to buy clothes. They will have to rebuild
their homes or find other places to live. They will have to replace
their automobiles. They will have to replace their home furnishings.
The commercial infrastructure also has to be replaced or rebuilt.
Literally hundreds of billions of dollars will be spent and
virtually every sector of our economy will benefit. Financially, the
impact of Katrina will cause an economy that had been slowing to
expand further. Companies will need more raw materials and employees
to meet this demand. Wages may increase.
I don’t believe the Federal Reserve will keep interest rates at
their current levels. Energy costs are causing general merchandise
prices to rise. The demand for goods and services in the wake of
Katrina will cause prices to go up even further. As a result, I
believe the Federal Reserve will continue to raise the Federal Funds
Rate. That means that interest rate will continue to rise.
So don’t panic. Don’t react out of fear and make drastic changes to
your portfolio or your strategy. If you are an ultra-conservative
investor that can’t stomach the gyrations of the stock market, then
you should continue to avoid it and invest in things like
government-guaranteed Certificates of Deposit. Those who have a
portion of their portfolios in the stock market or real-estate
should leave them there and possibly even increase their equity
exposure.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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