Wall Street, after a surprisingly strong week in the face of the Hurricane Katrina catastrophe, will soon face new challenges with the grim economic statistics spawned by the massive storm and flooding.
The blue-chip Dow Jones Industrial Average jumped 2.2 percent in the week to Friday to 10,678.56 and the Standard and Poor's 500 broad-market index rallied 1.9 percent to 1,241.48. The NASDAQ composite gained 1.6 percent in the holiday-shortened week to end Friday at 2,175.51.
The major indexes reached their best levels in over a month, defying grim predictions of an economic calamity in the face of the devastation to the southeast US and its petroleum industry.
Some analysts said the market had already been beaten down in July and last month and was preparing to bounce back. But the market also was able to look past what many experts said would be a temporary and modest hit to the overall economy.
"We believe the market has held up very well during these trying times," said Ralph Acampora at Wachovia Securities.
The slump in the prior two months "leads us to believe that the correction that has been going on during August and July is over," he said.
Despite predictions that the storm will result in US$125 billion in losses and wipe out 400,000 jobs, many economists say this won't derail the national economy.
Ethan Harris at Lehman Brothers said the government's massive spending for recovery efforts in the wake of Katrina would likely limit the overall economic impact of the storm.
"Ironically, the bungled government response to the crisis has increased the chance of a positive outcome for GDP growth," he said.
"Public indignation has prompted a scramble to both assign blame for the mess and to prove which party cares more about the people affected," Harris said.
The authorization of over US$62 billion for relief means spending of "massive amounts," he said. "Hence the spending is several times the normal daily GDP of the region."
The market will have to confront what will be sharply lower retail sales for last month, a sharp rise in weekly jobless claims and a report on consumer confidence.
"The initial reaction of consumers was to stay home and hunker down. However, they will soon revert to type and start spending again," Chicago investment manager Marshall Front said.
"The overwhelming view seems to be that all we are in for is a few months of bad data but after that, the consensus view is that the economy will be off to the races," David Rosenberg at Merrill Lynch said.
Rosenberg said the Federal Reserve appears to be maintaining its stand on lifting interest rates, which could squeeze the economy at a vulnerable time and possibly hurt the housing market that has been holding up economic growth.
"If the Fed tightens in this uncertain macro climate, then the risks of a policy misstep will rise inexorably -- and so will recession risks for 2006," he said.
Stephen Auth at Federated Investments said that a key to the economic and market outlook is how consumers handle the surge in energy costs and the uncertain economic environment created by the hurricane.
"All eyes are on the consumer. Consumers represent about two-thirds of the US economy. Will gasoline prices and surging natural gas prices cause a major pullback in other spending?" he said
"Certainly consumers are likely to trim their sails somewhat," he said.