Obama May Inherit Bull Market After $6 Trillion Loss (Update3)
By Michael Tsang and Whitney Kisling
Nov. 5 (Bloomberg) -- When it comes to the U.S. stock market, Barack Obama has time on his side.
The Standard & Poor's 500 Index may be on the cusp of a rally by Inauguration Day in January, based on the speed of its tumble from last year's peak and the time it took stocks to gain before recessions ended in 1975, 1982 and 1991, data compiled by Bloomberg show. This year's plunge in stocks suggests that equity investors anticipate an economic contraction as severe as the one that began under Richard Nixon that will end in July.
U.S. stocks yesterday posted the biggest presidential Election Day increase since 1984 before Democratic nominee Obama beat Republican John McCain. The Illinois senator may benefit from the economic cycle after more than $6 trillion was erased from U.S. equities this year by the worst financial crisis since the Great Depression. U.S. stocks fell today.
``The markets will turn before we know the economic recovery is going on,'' said Robert Weissenstein, who oversees $125 billion as chief investment officer for the Americas at Credit Suisse Group AG's private banking unit in New York. ``The new president won't get tagged for the problems that exist. If things get better, they were there. That's politics. The general public will give credit to the new guy.''
The S&P 500 has jumped 12 percent from a five-year low of 848.92 last week, trimming its decline to 39 percent since it peaked at 1,565.15 on Oct. 9, 2007. The gauge's 35 percent drop in 2008 would be its steepest annual retreat since 1937.
U.S. Stocks
The S&P 500 slid 5.3 percent to 952.77 today, its biggest plunge the day after a presidential election, as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth.
Europe's Dow Jones Stoxx 600 Index fell for the first time in seven days, losing 2.3 percent, after ArcelorMittal and Carlsberg A/S reported disappointing results. The MSCI Asia Pacific Index added 4.6 percent as Obama's victory spurred optimism that his spending plans will help the global economy recover from the credit crisis.
The S&P 500's slump since last year's high is the steepest for a comparable period since the gauge fell 43 percent in the 13 months ended in October 1974, Bloomberg data show.
The economy then was mired in a recession that lasted 16 months and ended in March 1975, five months after the equity market began its rebound. During the recessions of 1982 and 1991, the S&P 500 began to climb four months and five months before the economy started to recover, respectively.
Start of Recession
Economists Stephen Roach at Morgan Stanley and Neal Soss of Credit Suisse say this year's contraction was under way in March. Harvard University economist Martin Feldstein, a member of the National Bureau of Economic Research, said that month that a recession had probably started in the U.S. The group is responsible for dating business cycles in the U.S.
The U.S. economy shrank for first time since 2001 a year ago after the meltdown of the U.S. housing market left banks globally with almost $700 billion in writedowns and credit losses. That forced the administration of George W. Bush to authorize more than $1 trillion in spending to unfreeze lending.
Should the current recession be as severe as the one in the 1970s, it will last until July 2009, using the start dates given by Feldstein and Soss.
Based on the stock market's history of anticipating economic recoveries, the S&P 500 may embark on its next bull market in February, about a month after Obama's inauguration on Jan. 20.
`Inherit a Positive Market'
``Now if we are coming out of the recession, then yes, he will be the beneficiary of these current stimulus and banking policies,'' said Walter Gerasimowicz, the New York-based chief executive officer at Meditron Asset Management, which oversees $1.1 billion. ``He will most likely inherit a positive market over the course of the next several months.''
Still, Obama will have to contend with an economy pummeled by the fastest contraction in manufacturing in 26 years and the lowest consumer confidence. That may weaken any rebound as companies eliminate workers and consumers curb spending.
S&P 500 companies are poised for the fifth consecutive quarter of falling earnings, the longest streak since the 2001 recession. Profits decreased by 9.6 percent for the 415 companies in the S&P 500 that reported third-quarter results.
The U.S. economy contracted 0.3 percent during the quarter, and may shrink another 0.3 percent this quarter, according to economists estimates compiled by Bloomberg. In 2009, economic growth may slow to 1.15 percent, from 1.6 percent this year.
Economic Overhaul
``The problems started before the new president comes into office, but then they have to come up with the right solutions to get the economy moving and to stabilize the markets,'' said John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages $602 billion.
Obama, in what may amount to the broadest overhaul of the economy since Franklin D. Roosevelt's New Deal, intends to shift the tax burden toward the wealthy, roll back a quarter-century of deregulation, extend health-care coverage to all Americans and reassess the government's pursuit of free-trade deals.
Stocks may also retreat in the first month after Obama's victory before picking up, if election history is any guide.
The S&P 500 declined by 0.9 percent in the month after a Democrat wins the presidency, based on the median change of 10 Democratic victories since 1932, according to data compiled by Bloomberg. Still, when Democrats won for the first time, the S&P 500 recovered those losses and advanced 9.3 percent over the next 12 months.
``Psychology may trump math in this environment,'' said Credit Suisse's Weissenstein. ``But ultimately, math prevails.''
