Sandy's stimulative effect could be short-lived

Some sectors of economy could see gains,but disasters usually a zero-sum game

By Jeff Benjamin

Nov 4, 2012 @ 12:01 am (Updated 10:41 am) EST

Hoboken
Hoboken Bloomberg

In typical Wall Street style, the financial markets are already looking past the devastation created by Hurricane Sandy to any investment opportunities or risks.

Although it would be impossible to imagine the markets completely ignoring a natural disaster affecting 60 million people and causing at least $25 billion in damages, it appears that Wall Street has remained fixated on events yet to happen.

“You quickly turn from the "oh my gosh' phase to considering whether this might be stimulative to the economy,” said Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management. “Certainly, people are already looking through this to the other side of the valley.”

With that in mind, there are varying perspectives on whether the storm uncovered any legitimate investment strategies or new risks.

The big picture, according to Mr. Mortimer, adds up to a “zero-sum game, because if money moves into home improvement as a result of the damages, it doesn't go toward a vacation.”

Even the storm-related spending from the state and federal governments “is just tax dollars that come from other citizens,” he said.

However, most market watchers agree on a list of obvious areas of strength and weakness in the storm's immediate aftermath.

ETFS TO TELL TALE

If the homebuilding industry is expected to benefit from the additional work, it should show up in such broad-market exchange-traded funds as iShares Dow Jones U.S. Home Construction (ITB), PowerShares Dynamic Building & Construction (PKB) and SPDR S&P Homebuilders (XHB). The utility sector, which will need to undertake major repairs and upgrades along much of the Northeastern seaboard, can be tracked through the Utilities Select Sector SPDR (XLU).

Exposure to the broader energy sector, likely to be affected by rising oil prices resulting from some damaged refineries, can be gained through United States Gasoline (UGA), and the iShares Dow Jones U.S. Oil & Gas Index (IEO).

“You have to be really careful right now if your investing is storm-related,” said Dan Veru, chief investment officer at Palisade Capital Management LLC. “At times like these, when everybody tries to game the system, it can look like a hot-money trade.”

For example, Quanta Services Inc. (PWR), which provides contracting services to the electric utility industry, saw its shares jump nearly 10% when the market reopened Wednesday after being closed Monday and Tuesday.

The S&P 500, to the surprise of many, was essentially flat Wednesday.

But Thursday, as the broader equity markets rallied a full percentage point, Quanta lost 1.5%.

A similar hot-money story was seen in Generac Holdings Inc. (GNRC), a maker of portable generators for residential and commercial use.

The stock spiked 20% on Wednesday and held steady Thursday.

Beyond the hot-money activity, part of the zero-sum-game theory suggests that if businesses and individuals do a lot of storm-related spending now, their pockets will be empty down the line, Mr. Veru said.

“The money is really like water moving around in a bathtub,” he said. “At the end of the day, there will just be more money spent in the short run.”

Jim Russell, chief equity strategist at U.S. Bank Wealth Management Group, said that one of the few exceptions to the zero-sum-game theory is the retail sector in affected areas.

“Insurance companies, transportation and retail all got hit, but for some industries, the storm will create a ding to the economy now, which could lead to a rebound later this year or early next year,” he said. “But clearly, retail got clobbered, because they will probably suffer a loss of foot traffic for the next three weeks.”

MUDDYING THE WATERS

For the financial planning community at large, the storm only adds more complexity to the calculations they have to make over the next few months.

“The storm probably impacts the big picture and makes it even muddier,” said Lane Jones, chief investment officer of Evensky & Katz LLC.

He already has his clients' portfolios in a defensive position to take into account the effects of a presidential election, a weak earnings season and the year-end fiscal cliff.

Mr. Jones doesn't plan any additional adjustments related to the storm.

George Feiger, chief executive of Contango Capital Advisors Inc., expects Sandy to affect the market “only at the margins.”

“From looking at the television, it's pretty clear there will be demand for construction labor for the next six months to a year, and that will probably temporarily boost some of the local economies,” he said. “If I were an unemployed construction worker in New York, I'd be happy to know I'll probably be working during the next year, but will I be working in the year after that?”

The bigger challenge is still to come, Mr. Feiger said.

“We have continuing deterioration in Europe, China's economy continues to sink and we have the fiscal cliff,” he said. “In a few weeks, there will be little room to maneuver for whoever is elected president, because all those problems keep rolling along.”

jbenjamin@investmentnews,com Twitter: @jeff_benjamin

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