Hurricane Katrina's Sector Impact on Retail & Consumer Discretionary (XLY) and Financials (XLF)

Expect a lot of negative pre-announcements from consumer discretionary stocks, particularly retailers, in the wake of Katrina, writes XTF Advisors. Fair enough, since many stores had to be closed, but it’s almost a self-fulfilling prophecy, since companies now have perfect cover to explain any shortfall. However, any disappointments about Q3 could be offset by stronger activity in Q4, as rebuilding gets under way, and hundreds of thousands of people who escaped with only a few suitcases need to go shopping for winter clothing and life’s other essentials.

Let us caution, however, that we are not bullish on the Consumer Discretionary SPDR (XLY), as we believe that consensus estimates for 20% earnings growth next year—when overall S&P 500 earnings growth is set to slow to 10%—are simply too optimistic. We don’t buy the assumptions of margin expansion implicit in these consensus estimates, and as mentioned above at a P/E higher than all other sectors except for Technology, there is seemingly little room for disappointment.

The other obvious hit to earnings from Katrina will be in the financial sector, namely insurance companies, which account for 24% of Financial Sector SPDR (XLF) profits, and 22% of market cap. Despite the magnitude of the tragedy, it will not be treated as an “extraordinary event