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Reason for optimism as U.S. markets set to reopen

The New York Stock Exchange was empty of traders on Monday and Tuesday, but is to reopen on Wednesday.

Richard Drew/AP

A huge volume of pent-up trading activity is forecast for Wednesday when U.S. stock exchanges reopen after a rare two-day halt, but many market players are also expecting some additional good news – rising share prices.

"I believe that we will open up on the day," predicted Kent Engelke, chief economic strategist at Capitol Securities Management, an investment dealer based in Richmond, Va.

Mr. Engelke says he expects many investors will be relieved that damage from Hurricane Sandy appears likely to be in the $10-billion to $20-billion (U.S.) range, less than some feared. There is a "general feeling of 'Hey, we dodged this and it's not as bad as we thought it was going to be,'" he says.

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Trading volume is likely to get an additional boost because the reopening coincides with the last day of October, which may cause some institutional investors to adjust their portfolios in preparation for month end. As well, there could be a burst of speculative trading in advance of Friday's release of important U.S. jobs data.

Lengthy trading halts because of inclement weather are rare in the United States. The last two-day weather-related closure of the New York Stock Exchange was more than a century ago, in March, 1888, when a freak, late winter blizzard dumped nearly a metre of snow on the city. The exchange was also shut for four days in September, 2001, following the terrorist attacks on the World Trade Centre in New York.

Taking some of the sting out of this latest closing was the widespread preparation ahead of the event. As the size of the expected storm became clearer last week, and a trading halt became more probable, traders were able to trim their holdings.

"We're not particularly concerned about the impact of the closure of U.S. financial markets for a second day. Unlike the closures after the 9/11 attacks, the storm and the shut down of the stock market were known about in advance, allowing investors time to adjust positions," said Paul Ashworth, chief U.S. economist at research firm Capital Economics, in a note to clients.

As always after natural disasters, analysts are expecting a bounce in shares of companies that may benefit from rebuilding expenditures, such as building-supply companies Home Depot and Lowes.

Property and casualty insurers may come under pressure since they will have to cover damage claims from the storm. The stocks of many large insurers, such Travelers Cos., sold off last week in anticipation of storm costs.

The trading halt may actually have had a beneficial effect, by reducing market volatility. Natural disasters often provoke knee-jerk downdrafts in stock prices as investors rush to sell their holdings as the catastrophe unfolds while awaiting a better understanding of the actual damage done to the economy. But when trading resumes Wednesday, market players will have the benefit of hindsight on the extent of the calamity.

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"I think the fact that they've actually been closed for the last two days" will have a calming effect on the market, said Beata Caranci, deputy chief economist at TD Bank.

The limited trading of stock market futures this week indicates market jitters have died down. At one point on Monday during the storm, the contract on the Dow Jones Industrial Average had plunged more than 100 points. But by early Tuesday morning, it had fully recovered to sport an 8 point advance.

Economic and corporate news may also bolster equities.

The S&P/Case-Shiller home price index for August, released Tuesday, showed a rise in U.S. home prices. The result suggests the hard-hit real estate sector in the U.S. is continuing its slow improvement, which should bolster consumer sentiment.

On the corporate earnings front, energy giant BP reported better than expected results and raised its dividend, while Deutsche Bank announced results that exceeded expectations.

Markets in Europe gained around 1 per cent Tuesday. If there were fears that the hurricane would have a severe impact on the U.S. economy, those markets would likely have fallen.

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Another plus is that European markets have gone for a few days without any new eruption in the sovereign debt crisis. "There has been no major calamity" in Europe, Mr. Engelke said.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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