Traders, apparently gleeful that the long, grueling presidential campaign is over, pushed the Dow Jones Industrial average up more than 300 points on Tuesday.
The surge seemingly had less to do with Democratic candidate Barack Obama’s win than with the elimination of the uncertainty inherent to all presidential elections.
But reality should return to the markets quickly in the form of an employment report due Friday that is expected to offer further evidence that the U.S. is headed into a deep recession.
“This may only last a couple of days, this glee in the stock market,” said commodity expert Kevin Kerr, head of Kerr Trading International.
“We’ve seen this in past elections -- a rally at the end of the election cycle, and then reality sinks back in. None of the things we’ve been dealing with have gone away. There’s still a housing debacle, a credit crunch, and the biggie -- these employment numbers. There will be a dose of reality on Friday when we get that number,” said Kerr.
Indeed, Wednesday’s markets, having already priced in an Obama victory, could well reflect the gloomier realities plaguing the U.S. economy – but there were few signs of it around midnight Eastern time, as Asian markets were generally several percentage points higher.
Economists believe 175,000 U.S. jobs were lost in October. That’s on top of 159,000 jobs lost in September. If the October predictions are correct, the unemployment rate will climb to 6.3% from 6.1%.
Looking ahead, many forecasters see unemployment topping 8% by 2010.
The U.S. auto industry offers stark evidence that the economy is getting worse not better.
General Motors Corp. (GM) reported that October sales fell 45% from a year earlier. Ford (F) said sales were down 30%, and Toyota (TM) was off by 23%.
These numbers are alarming not only for what they mean to the struggling car companies, but also because they point up both the reluctance as well as the inability of Americans to buy big ticket items such as automobiles.
All of this means President-elect Obama will likely be forced to pump billions more into the economy to avert a financial catastrophe reminiscent of the Great Depression.
How much he spends will depend on whether Obama presides alongside a filibuster-proof Senate (comprised of 60 Democrats or more).
Not surprisingly, Democrats are viewed on Wall Street as more likely that Republicans to ask, “How can we spend our way out of this problem?” said Art Hogan, chief market strategist at Jefferies & Co.
A lot of that spending is likely to occur in the form of a second stimulus package, this one focused far more on infrastructure projects to create jobs rather than the tax rebates that were the centerpiece of a $162 billion stimulus package earlier this year.
That package is now widely viewed as ineffective.
Hogan said a stimulus package comprised mostly of infrastructure projects would benefit non-residential construction stocks. On the other hand, Democrat-led health care reform would hurt health care stocks, he said.
In any event, all that spending is sure to rekindle inflation fears.
“One thing is pretty clear -- a lot of money will be thrown at the economy to see what sticks,” said Axel Merk, manager of the $400 million Merk Hard Currency Fund.
Merk said Obama would be wise to focus immediately on job creation.
Federal programs aimed at infrastructure improvements will be far more effective in staving off an economic catastrophe than, say, health care reform, Merk said.
In any case, the end of the election will hopefully prompt investors to look ahead rather than dwell on the past.
“The key thing is we stop whining about October and start looking forward to what the new administration is going to do,” said Merk.
Tuesday’s rally was a good start in that direction.
Cavuto: McCain’s Got the Courage, Not the Conviction
Job losses accelerate, and worst may lie ahead
Consumer Spending Remains Flat in August
