Whither Financials?

Can the S&P 500 pick up the pace in the fourth quarter with financial stocks stuck in neutral?

With only a few weeks remaining in the third quarter and the finish line for 2005 now in sight, the S&P index is barely in positive territory, up just under 2% for the year. The fact it has any gains at all is mostly a testament to the strength of energy and utility stocks, which have carried more than their puny 12% combined weight in the index.

By removing energy and utility shares from the mix, the extent to which the remaining seven sectors that compose the S&P have been dead weight becomes uncomfortably clear. The most obvious anchor has been the 2.5% drop in financial stocks. These issues make up the biggest share of the index at just under 20%, and typically they are the engine behind any widespread rally.

When asked if financials will finally begin pull their own weight in the fourth quarter, most mutual fund managers reply, "It depends." That is, the question is whether you're talking about insurers, brokers or banks.

The Katrina Coin Flip

The Philadelphia KBW Insurance Index has largely rebounded from its post-Katrina lows, but the continuing uncertainty over the size and scope of the hurricane's damage is keeping many financial services fund managers from giving the sector the all-clear sign. Estimates for insured losses have risen in the last week to more than $35 billion, more than double the original post-Katrina assessment.

How much higher they can go seems like anybody's guess at this point. Major property and casualty insurers like Allstate(ALL Quote - Cramer on ALL - Stock Picks) say it will take more than a month before they can get a handle on the total payout, mostly because of the challenges in getting claim adjusters on the scene.

"Insurance companies are in flux due to Katrina. It's something of a coin flip," says Doug Burtnick, senior portfolio manager for the (GLFAX Quote - Cramer on GLFAX - Stock Picks)Gartmore Global Financial fund.