Economic Fears May Offset Any Relief Rally

Stocks are expected to rise early in the week as investors breathe a sigh of relief that damage from Hurricane Rita was not as bad as feared.

But earnings warnings and weak economic indicators expected later in the week could blunt any rally.

The storm dealt only a glancing blow to Houston, the center of the U.S. oil industry and the fourth-largest U.S. city.

“The damage from the storm, both in terms of the physical damage and any human impact, was certainly less than expected, so that should really bode well for the financial markets,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y.

About 15 Texas and Louisiana refineries were shut down before the storm hit.

Falling energy prices could help fuel the expected rally in stocks. Prices had reached record highs early this month in the wake of Hurricane Katrina.

Stocks could be up “several percent” on a relief rally early in the week, about equal to any drop in energy prices, Ghriskey added.

The week also offers a slew of economic reports, and investors are likely to focus on data on consumer confidence, which is key to consumer spending, and weekly oil inventory figures for clues to the direction of oil prices.

“The big question here is the psychological impact and the financial impact that high energy costs are having on consumers,” said Peter Cardillo, chief strategist at S.W. Bach & Co.

The companies reporting earnings this week include top drugstore chain Walgreen Co., spice maker McCormick & Co. and soft-drink giant PepsiCo Inc.

In addition, home improvement retailer Lowe’s Cos. will host an analyst meeting, and Chevron Corp. is scheduled to provide an interim update.

“Earnings warnings are in the air, and obviously there will be continued warnings on the consumer side. The Street is behind in lowering expectations for this group, and there are negative surprises likely ahead in that group,” Ghriskey said.