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Obama could inherit bull market after $6tr bloodbath this year
When it comes to the US stock market, Barack Obama has time on his side.
- Bloomberg
- Published: 23:32 November 5, 2008
New York: When it comes to the US 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 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.
US stocks on Tuesday 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 US equities this year by the worst financial crisis since the Great Depression. US stock-index futures fell yesterday.
"The markets will turn before we know the econ-omic recovery is going on," said Robert Weissenstein, who oversees $125 billion [Dh459.75 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 jumped 18 per cent from a five-year low of 848.92 last week, trimming its decline to 36 per cent since it peaked at 1,565.15 on October 9, 2007. The gauge's 32 per cent drop this year would be its steepest annual retreat since 1937.
Futures on the S&P 500 expiring in December slipped 1.1 per cent at 12:34pm in London yesterday before a report that may show service industries shrank in October for the sixth time in 10 months as a lack of credit and slowing sales caused companies to cut spending and payrolls.
Europe's Dow Jones Stoxx 600 Index fell for the first time in seven days, losing 1.7 per cent, after ArcelorMittal and Carlsberg reported disappointing results. The MSCI Asia Pacific Index added 4.8 per cent 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 per cent in the 13 months ended in October 1974, Bloomberg data show.
History
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.
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 US. The group is responsible for dating business cycles in the US.
The US economy shrank for first time since 2001 a year ago after the meltdown of the US housing market left banks globally with almost $700 billion in writedowns and credit losses. That forced the administration of George W. Bush to authorise 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 market's history of anticipating recoveries, the S&P 500 may embark on its next bull market in February, about a month after Obama's inauguration on January 20.
"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."
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