Gustav Sets the Direction on Wall Street

Instability is expected on Wall Street this week as investor sentiment will depend on oil prices, which are rising again due to Hurricane Gustav, as well as several important economic reports.

Last week, the Dow Jones index fell by 0.74 percent to 11,543 points. The S&P index lost 0.78 percent, diving to 1,282 points, while the Nasdaq index plummeted by 1.95 percent to 2,367 points. Hurricane Gustav is expected to reach the U.S. coast, Louisiana, at the beginning of this week, prompting most oil companies to halt production at their facilities, which is causing oil prices to rise again.

Last week, oil prices ranged from $115 to $119 per barrel. As the price of ‘black gold’ increased, so did the stock prices of oil companies, while stocks in most other sectors lost value. Conversely, with the drop in oil prices, energy stocks became cheaper, while stocks in other sectors became more expensive.

"At the beginning of this week, Gustav will be the focus of investors; he will likely drive the market in one direction or another," says John Praveen, a strategist at Prudential International Investments Advisers. Several important statistical reports are also expected this week. Last week, market sentiment was boosted by the data showing that the U.S. gross domestic product grew by 3.3 percent in the second quarter, rather than the 1.9 percent indicated by preliminary data. However, this is primarily attributed to the increase in exports.

"If you look at GDP, you would believe that the economic situation is solid. However, if you look at other segments – employment, industrial production, and personal incomes – the economy appears weak," says Hugh Johnson, a strategist at Johnson Illington Advisor. This week, the focus of investors will be the government employment report. It is expected that the number of employed in August will fall for the eighth consecutive month, by 85,000 people. The unemployment rate is estimated to remain unchanged at 5.7 percent.

"The market is extremely unstable and reacts to every macroeconomic data point, so all statistical reports released this week could significantly impact the market," says Praveen. Additionally, Freddie Mac and Fannie Mae will continue to be in the spotlight for investors. Last week, the stock prices of these mortgage banks rose sharply as investors became increasingly confident that the U.S. government would not nationalize Freddie and Fannie, meaning that small investors would not be squeezed out and the value of their stocks would not decrease. This boosted the entire financial sector last week. However, given that the credit crisis is not yet over, stability in the financial sector cannot be expected, and significant fluctuations in that sector remain possible, analysts conclude. (H)