The Stock Market Reopens: 4 Things to Watch
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The Fiscal Times
October 31, 2012

New York’s financial markets reopened as “normal” today, although it’s a safe bet that the number of those able to make it along streets blocked by downed trees or flooded commuter rail tracks was a fraction of the usual Wall Street population. Nor, with so many without power in the suburbs, will it be easy for them to stay at home and trade from there. Nonetheless, it’s likely that, after the hell and high water of Sandy, the pros will find a way to reflect their post-storm opinions of everything from the property insurance companies to home improvement retailers like Home Depot (HD).

Early trading was mixed, with the Dow Jones industrial average and the Standard & Poor’s 500-stock index both modestly higher and the tech-heavy Nasdaq moving lower as Apple (AAPL), still the market’s 800-pound gorilla, lost nearly 2 percent.

Those interested in the future of trading systems will watch as debate resumes over how to rely on electronic trading to keep markets open even in the midst of natural catastrophes such as Sandy or Hurricane Irene last year. NYSE Euronext (NYX) had planned to shut down its trading floor during the storm, but had hoped to keep electronic trading running for the first time, part of an emergency plan it has had in place for a few years but has never tested in “real time.”

Customers balked, however, not having done their own tests and not putting much reliance in electronic systems to replace the trading floor in the crucial opening and closing moments of the trading day. That unease isn’t surprising, given the “flash crash” and other examples where computer-driven trading systems or models have created turmoil in markets, but it’s something that regulators and industry members will clearly need to address in the coming weeks.

In the shorter term, however, there are a couple of things on which investors should keep an eye today.

Volatility: Already the market is scrambling to assess the magnitude of the damage wreaked by Sandy in dollar terms as well as the impact on infrastructure and human lives. Given the magnitude of the storm and the disruption caused, that’s likely to take a while, and in the meantime, volatility will be the order of the day.

It won’t help that we’re at the end of the month, a period when traders and many investment managers typically tidy up their books and make allocation adjustments. Exacerbating that is the fact that for some funds, it’s the end of the fiscal year. Activity that would have been spread over a few days now will be packed into a single session – and one that is taking place in the final weeks of the third-quarter earnings season, during a period of economic uncertainty, with key jobs market data due for release in only 48 hours and less than a week away from a hotly contested U.S. presidential election. If Sandy was the “perfect storm” in meteorological terms, this is a combination that suggests a “perfect storm” for market volatility.

Insurance Companies: It seems clear that Sandy will rank as one of the five or 10 costliest hurricanes, with economists putting forth estimates of the damage that range from about $20 billion to $50 billion. (That compares to an astonishing $108.4 billion for Hurricane Katrina, still the costliest storm of its kind.) AIR Worldwide, which specializes in risk modeling, calculates the share of those costs that will be shouldered by the insurance industry to be at least $7 billion and as much as $15 billion, a figure that includes not only damage to homes from falling trees and floods but the expenses incurred by displaced homeowners and the cost of compensating the insured for an interruption in their business activity.

Of course, that’s bad news for everyone, coming after a bad year for property/casualty claims in 2011. The insurance companies like State Farm and Erie Indemnity Company (ERIE) will have to dip deeply into their cash reserves in the short term, but homeowners with property anywhere near the coast – or other bodies of water prone to flooding – should brace themselves for higher premiums going forward. Insurers such as Erie, Travelers (TRV) and Allstate (ALL) each lost about 1 percent or less.

Holiday shopping – and retail spending: That brings us to the impact on the wallets of those hit by the flood. Yes, there will be a surge of spending at home improvement stores like Lowe’s (LOW) and Home Depot (HD), as homeowners and their contractors get to work dealing with the physical havoc wrought by the high waters and gale-force winds. Both companies have hundreds of trucks stuffed full of inventory ranging from chain saws and ply board to generators. And both stocks were about 2 percent higher in morning trading.

But some analysts already noted that these lower-margin products aren’t likely to provide an immediate boost to earnings at either company, especially since the worst hit regions don’t account for a significant chunk of sales. Longer term, both could benefit if those homeowners don’t just repair kitchens, for instance, but opt to replace them and install new flooring.

The storm, however, touched down only weeks before the holiday shopping season kicks off, and even without economic uncertainty hovering, the need by anxious consumers to spend on home repairs may curtail their ability or willingness to snap up electronic gadgets and other gift items during the holiday season. This is a regional rather than a national phenomenon, of course, but on the margin may put a dent in sales and profits growth at retailers ranging from Macy’s (M) to Gap (GPS) and Williams-Sonoma (WSM).

The economy: So far, the consensus seems to be that the superstorm won’t derail the U.S. economy. True, the disruptions caused by the storm itself and the need to devote time and resources to repairs will curb economic growth; Beata Caranci, deputy chief economist at TD Economics, a division of the Toronto-Dominion Bank, noted in a report yesterday that the hurricane likely will cause the firm to cut its estimate of 1.7 percent GDP growth for the fourth quarter “once there is greater clarity on work and output disruptions.”

But she noted that damage to physical infrastructure doesn’t register on GDP, while the work on rebuilding them does contribute positively to this measure of economic growth. Moreover, she adds, ”the reconstruction phase may create an opportunity to usher in new and updated technologies that would otherwise have been difficult to implement.” Perhaps there are opportunities for vendors of new “green” technologies to make inroads into the market – and those may well generate savings for households in years to come.

The storm system that has wreaked so much havoc from the Carolinas all the way up to Maine, and inland as well, gave us only days to prepare to withstand its fury. But it will take months to recover, and weeks – at least – to understand the fallout in market and investment terms. There certainly will be opportunities to trade around “winners” and “losers” as markets reopen, but the risks associated with volatility also have multiplied. Speculators beware.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.