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Will elections bring back stock bulls?
2006-11-04
U.S. stocks may rise slightly next week as companies wrap up a robust quarterly earnings season, but the U.S. mid-term elections and worries about an economic slowdown could keep many investors wary. Historically, the U.S. mid-term elections have been bullish for the stock market, according to the Stock Trader's Almanac. But politically sensitive stocks could experience some volatility on Tuesday, when U.S. voters go to the polls, and on Wednesday as traders digest election results. "The biggest variable for stocks this week is the elections," said Benjamin Halliburton, managing director of Traditional Capital Management in Summit, New Jersey. Many analysts and insiders of both major U.S. parties have been forecasting that the Republicans may lose control of the House of Representatives and they believe the Senate will be a close contest. Investors are expecting political gridlock, which could be good for stocks. But if Democrats pull in a stronger showing than expected, it could prompt some worries. "Depending on how the House and Senate go, it can impact sectors differently in the market," said Dayle Malone, portfolio manager of Old Second Wealth Management in Chicago. "There might be a pretty big reaction to a big change in control." The Democrats have vowed to take on some controversial reforms, including the repeal of President George W. Bush's reduction in the tax rate on capital gains and dividends, which could make their wins a negative for stocks. "I think the market is prepared for a split," Halliburton said. "Unless you happen to see both houses of Congress go to one party, one way or the other, we're not expecting a big move." Since 1934, the Dow Jones industrial average (^DJI) has gained about 2.9 percent on average during the eight trading days surrounding the election, according to the almanac. STRENGTH IN NUMBERS Next week also marks the beginning of the end of the third-quarter earnings season. Aside from the elections and some economic data later in the week, investors will likely look to some earnings bellwethers, like Cisco Systems Inc. (Nasdaq:CSCO) and Federated Department Stores Inc.(NYSE:FD) for direction. Strong third-quarter earnings in the last few weeks have helped support the stock market's recent momentum. But stocks have pulled back recently, so more good news on the earnings front could help boost equities. For the week, the Dow Jones industrial average (.DJI) fell 0.9 percent. On Friday, the Dow closed below 12,000 for the first time since mid-October. The Standard & Poor's 500 Index (^SPX) dropped about 1 percent for the week and the Nasdaq Composite Index (^IXIC) lost 0.8 percent. "I think the market is still headed higher," said Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey. "This was yet one more quarter in which earnings came in stronger than expected. Analysts keep anticipating a slowdown in earnings and it just hasn't happened." More than 80 percent of S&P 500 companies have reported quarterly earnings with nearly three-quarters of the firms beating analysts' estimates, according to Reuters Estimates. Network equipment maker Cisco, often viewed as a bellwether for technology companies and U.S. capital spending, is expected to post higher earnings on Wednesday for the first quarter of its fiscal year 2007. Results and forecasts from Federated, the parent of Macy's and Bloomingdale's, also will be watched closely so investors can get an indication on the coming holiday shopping season. Federated's results also will be released on Wednesday. "Once we get past the election, folks start thinking about how the holiday shopping season is going, so some of the retail numbers will become important," Malone said. CAUTIOUS CONSUMERS Also coloring investors' views of the retail sector will be the University of Michigan's preliminary reading on November consumer sentiment, due on Thursday. Economists polled by Reuters expect the University of Michigan's November consumer sentiment index to remain the same as in October, suggesting the recent drop in energy prices has not been enough to motivate consumers to spend more. U.S. crude oil futures prices are down about 25 percent from their lifetime NYMEX high of $78.40 a barrel set on July 14. On Friday, December crude oil settled at $59.14 on the New York Mercantile Exchange. The latest snapshot of the U.S. trade deficit also will be available on Thursday. The Reuters poll calls for the September trade deficit to narrow to $66.0 billion from $69.9 billion in August. Investors also will be contending with a series of conflicting economic reports from the last few weeks. Recently, worse-than-expected productivity and third-quarter gross domestic product growth have painted a picture of a slowing economy. But the Labor Department said on Friday that the October unemployment rate fell to a 5-1/2-year low and made significant upward revisions to August and September payroll data, which suggested the U.S. economy is still growing. "It will take time for people to fully digest the implications of the employment report," Lieberman said. "If job growth remains strong enough that the unemployment rate is still falling, higher inflation lies somewhere down the road." (Wall St Week Ahead runs weekly. Questions or comments can be e-mailed to emily.chasan(at)reuters)
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