Investing: Katrina: What's An Investor To Do? Article

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Investing: Katrina: What's An Investor To Do?

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.

Author: Jeffery Voudrie

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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.

About Author

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com .

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