updated 9/11/2005 6:14:07 PM ET 2005-09-11T22:14:07

Stock investors are feeling bullish these days, shrugging off so far the effects of $3-per-gallon gasoline and the short-term economic impact of Hurricane Katrina’s devastation.

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That’s due in part because crude oil prices have dropped below their pre-Katrina levels as more Gulf Coast production and refining capacity is restored. Also, in a rare burst of long-term thinking, investors also anticipate that a reconstruction boom may help boost economic growth in 2006.

And finally, there’s the belief — or perhaps just a hope — that Federal Reserve policy-makers won’t raise interest rates another quarter percentage point when the Federal Open Markets Committee meets Tuesday, Sept. 20. The argument for pausing is that it’s better to wait and gauge the impact of the storm’s shock to the economy before making borrowing more expensive for the reconstruction effort.

It’s a nice theory. But is it something to gamble on?

Whither Greenspan?
Fed Chairman Alan Greenspan is ready to quit Jan. 31, 2006, when his term expires. It’s widely expected that he will want to give his successor leeway to cut rates meaningfully if the economy softens after his departure. That bodes for continuing rate hikes. In addition, Sept. 20 may be too soon to fully understand Katrina’s impact. As such, the Fed may err on the side of containing inflation, especially as energy costs soar, and keep the rate hikes coming.

Furthermore, anyone looking for a year-end rally, such as the postelection surge in stocks last year, could be disappointed. Yes, $63 per barrel of oil prices is better for most than $70 oil. But it’s still far above last year’s $40 price and there’s no election to quickly and decisively provide clarity and guidance for the nation’s future.

High gasoline and heating oil prices will curtail consumer spending going into the critical holiday shopping season. A substantial swath of the population will remain displaced for months. And while reconstruction will certainly generate economic activity, is it enough to replace what was already going on in the region to begin with?

Once the euphoria of falling crude futures wanes on Wall Street, the hard questions will remain, and could weigh on stocks in the weeks ahead — especially if the Fed goes ahead with another rate hike. This may not be a cause for a sell-off, but may not be enough to justify a buying spree.

For now, however, falling oil prices were enough to spur the stock market to a week of solid gains. The Dow Jones industrial average surged 2.21 percent, the Standard & Poor’s 500 index gained 1.93 percent, and the Nasdaq composite index climbed 1.61 percent.

Consumer, producer price indices due
Wall Street’s most trusted gauges of inflation, the Consumer Price Index and Producer Price Index, will be released in the week ahead, and will almost certainly move the market coming so soon before the Fed’s meeting.

The Labor Department’s PPI index, which measures prices at the wholesale level, was expected to rise 0.7 percent in August, down from a 1 percent jump in July, when it’s released Tuesday. “Core” PPI, with fuel and food costs removed, was expected to climb just 0.1 percent, compared to July’s 0.4 percent rise.

On Thursday, the Labor Department will release the CPI, which is expected to climb 0.5 percent, level with July’s 0.5 percent gain. Core CPI, again with costly energy and food costs removed, was expected to post an 0.2 percent gain, up from a 0.1 percent rise in July.

Should either of these indexes move higher than expected, it would raise the specter of inflation and higher interest rates. And that would certainly push stocks lower.

Earnings trickling in
There’s still a month to go before third-quarter earnings season begins, but those companies that traditionally report early are starting to trickle in with their results. Bear Stearns Cos. Inc. will help kick off brokerage earnings next week with its report Thursday morning. The Wall Street firm is expected to earn $2.41 per share, up from $2.09 per share a year ago. The company’s stock has risen 21 percent from its 52-week low of $86.51 on Oct. 20, 2004, closing Friday at $104.66.

Cruise ship operator Carnival Corp. could see higher fuel costs eat into its profits — if not this quarter, then perhaps the next — but has said passenger volume remains strong. Carnival stock has fallen 16 percent from its Jan. 19 high of $58.98, closing Friday at $49.70. The company is expected to earn $1.36 per share, up from $1.23 per share a year ago, when it reports Thursday morning.

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