Two days after Hurricane Katrina hit the Gulf Coast, the impact on the overall economy is still being assessed. But stock prices rose Wednesday, thanks to a pullback in oil prices and optimism that the hurricane's fallout would include a less aggressive

Federal Reserve

.

Crude oil for October delivery dropped below $70 per barrel after the government announced it would open the nation's strategic petroleum reserves to provide crude oil to refineries. It finished Wednesday's trading session at $68.55, down $1.26 on the day.

Gasoline prices, however, continued higher, given that eight major refineries have been shut down. Gasoline, which already jumped 20% Tuesday, gained another 7.5 cents to finish at $2.55 a gallon on Nymex.

Amid rising expectations that the surge in gasoline prices will take a toll on consumption and shave off some of the economic growth in coming quarters, the bond market rallied. The benchmark 10-year Treasury bond rose 20/32 in price, while its yield dropped to 4.02%, a three-month low.

With yields falling across the maturities spectrum, which coincided with expectations the

Fed may pause or cease its tightening campaign because of Katrina's impact, investors have shifted money away from the fixed-income market and into stocks.

Following weakness in morning trade, major stock averages finished higher, with the

Dow Jones Industrial Average

up 68.78 points, or 0.7%, at 10,481.60, after touching a morning low of 10,356. The

S&P 500

rose 11.92 points, or 1%, to 1220.33, after a morning low of 1204. The

Nasdaq Composite

gained 22.33 points, or 1.1%, to 2152.09. (Still, August was a rough month for shares; for the month, the Dow lost 1.4%, the S&P lost 1.1%, and the Nasdaq fell 1.5%.)

"I'm taking money out of bonds and putting it into stocks," says Jim Paulsen, chief investment officer at Wells Capital Management. "When some of the fear comes out of the market in coming weeks, you'll see that trend

of rising bond prices reverse."

Likewise, he believes that once the uncertainty about the supply of oil subsides, oil prices are due to pull back from current levels.

"Oil is already pretty well darn high, and energy stocks have all moved higher. I would sell into the energy sector's strength and buy tech stocks, which seem to be the most inversely related to oil," Paulsen says.

On Wednesday, however, oil shares were still a big factor helping major stock averages to the upside. The Amex Oil Index gained 3.3%.

Valero Energy

(VLO) - Get Report

, which gained 9%, and

Exxon Mobil

(XOM) - Get Report

, up 2%, were the biggest volume movers on the

New York Stock Exchange

.

Betting on a big decline in oil prices remains a long shot at the moment. Katrina has caused oil production and refining facilities to shut down in the Gulf of Mexico and three southeastern states.

According to Action Economics chief economist Mike Englund, about a third of the petroleum produced in the U.S., meeting about 45% of U.S. demand, comes from the Gulf of Mexico, and about 90% of this production moves through Louisiana. So far, nine offshore rigs and 12 platforms have been evacuated, and refineries have been shut down in Louisiana, Alabama and Mississippi.

Since Katrina hit the region, the impact on energy prices has been quick and dramatic. Western Texas Intermediate crude oil prices are up almost 7%, heating oil for December delivery is up 7.5%, natural gas is up 11%, and gasoline is up 7.4% from pre-hurricane levels.

"Supply disruptions will have a price impact that could linger through the winter, given tight inventories of many refined products," Englund says.

While economists expect Katrina's overall impact to be negative for growth, some positive fallout is still expected in some sectors of the economy as well as for the shares of the companies in those sectors.

The near-term impact of a storm is usually, and counterintuitively, positive for economic growth. Reconstruction efforts, funded by insurance companies and government aid, quickly find themselves boosting current production numbers, and therefore the national GDP.

In Katrina's case, total insured costs could go as high as $26 billion, while total damages are expected to reach close to $40 billion. A large part of that money will likely find its way to companies in the construction and engineering sectors.

Not surprisingly, the Dow Jones U.S. Building Materials Index has been gaining since Monday, and it moved sharply higher Wednesday, as some of the damages and the costs from Katrina's devastation became clearer. The index finished with a gain of 3.7% Wednesday and is up 5% since Friday's close.

Shares of heavy-gear makers such as

Caterpillar

(CAT) - Get Report

and

Deere

(DE) - Get Report

rose sharply Wednesday, as did shares of construction and engineering firms such as

Michael Baker

(BKR)

,

Tetra Tech

(TTEK) - Get Report

and

URS

(URS)

.

Other big gainers in the group included

Fluor

(FLR) - Get Report

,

Shaw Group

(SGR)

,

Chicago Bridge and Iron

(CBI)

,

Foster Wheeler

(FWLT)

and

Jacobs Engineering

(JEC) - Get Report

.

While some have taken a beating since Katrina hit the Gulf region, regional utilities may also present an interesting investment opportunity. According to Standard & Poor's analyst John Piecuch, both

Entergy

(ETR) - Get Report

, New Orleans' biggest electricity provider, and

Southern

(SO) - Get Report

unit Mississippi Power have suffered "extensive outages and damages to transmission and distribution systems."

But these costs are eventually covered by insurance, while regulators allow utilities to charge more, which eventually boosts earnings. On Wednesday, Entergy fell 2.2% while Southern rose 1%.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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