The Euphoria May Be Short-Lived
11/06/2008 12:08 pm EST
Election Day, USA brought hope for prosperity, with the US markets posting their biggest Election Day rally ever! The Standard & Poor’s 500 index gained 4.3% Tuesday to close at a four-week high and the Dow Jones Industrial Average was up 3.3%. Senator Barack Obama was the clear winner in the presidential election, but as of late Wednesday, it doesn’t appear Democrats gained enough seats in the US Senate to reach the 60-seat filibuster-proof majority they had hoped for.
And while many people think that Republican administrations are best for the stock market, actually, since World War II markets have done much better when Democrats rule. According to International Strategy and Investment, from 1944 through mid-2008, the S&P 500 gained 10.7% under Democratic presidents and just 8% in Republican administrations.
As Americans went to the polls, the rest of the world seemed just as energized, the FTSE Eurofirst 300 stock index jumped 4.3%, the FTSE 100 posted its best close in four weeks—up 4.4%—and the Nikkei advanced 3.2%, its highest in four weeks. But by Wednesday most European bourses were posting losses, and US markets followed suit. The exception was the battered Nikkei, which closed up 4.5%.
So, after the euphoria of “change,” reality has set in. Japan is forecasting a third-quarter recession. Following interest-rate cuts in the US, China, and Japan, Australia announced a larger-than-anticipated 75-basis point cut. By the end of this week, the UK and the euro zone will most likely enact their own rate cuts.
The Markit Eurozone Purchasing Managers’ Index declined from September’s 48.4 to 45.8 in October, a ten-year low and considerably less than the 46.9 expected by economists.
Global earnings are not helping. BMW (Frankfort: BMW3.F) slashed its 2008 forecast following a 60% reduction in its quarterly profit, including a 32% plunge in US sales. And writedowns continue, with UBS (NYSE: UBS), Royal Bank of Scotland (NYSE: RBS), and reinsurer Swiss Re (Stuttgart: SGR.SE), all announcing more losses. Societe Generale (AMEX: GLE) and Commerzbank AG (Stuttgart: CBK.SG) took hundreds of millions of euros of write downs connected to Lehman Brothers and other bad debts.
In fact, the International Monetary Fund (IMF) reported that banks in Europe are almost twice as leveraged as those in the US, due to their aggressive lending strategy during the easy credit phase. A Citigroup strategist said that they may need to raise an additional $400 billion in fresh capital before this crisis ends. It’s happening already.
Yet some pros are actually beginning to get a little optimistic, believe it or not.
Seeing the bright side of the metals business, Lawrence Roulston, editor of Resource Opportunities, believes opportunities will emerge from the global crisis.
Allan Nichols, editor of Morningstar InternationalInvestor, finds new value in a household name, while John Snowden, editor of The IRS Report, turns to a 19th-century stalwart for profits in the cash-and-carry business.
And although we still have a rough road ahead, perhaps this unprecedented election in the US will serve as a harbinger of good fortune. We won’t know for a while, but if nothing else, the results indicate that change is surely on its way.
Nancy Zambell edits Global Investing for MoneyShow.com. Her opinions are her own and not necessarily the views of InterShow or MoneyShow.com.