Election Day Boosts Markets After Steepest Declines Since 1970s

By Michael Patterson and Daniel Kruger

Nov. 5 (Bloomberg) -- Election Day in the U.S. is proving a haven for investors around the world contending with the worst stock, bond and commodity markets in more than three decades.

Japan’s Nikkei 225 Index added 2.1 percent at 9:42 a.m. in Tokyo, while the MSCI Asia Pacific Index climbed 2.3 percent. The Standard & Poor’s 500 Index yesterday gained 4.1 percent to a three-week high of 1,005.75 after plunging faster over the past year than any time since 1974. Oil, copper and gold surged, the dollar dropped, and the cost of protecting corporate bonds from default through 2013 fell to the lowest in two weeks.

The election of Democrat Barack Obama, who leads in the polls, or Republican John McCain may help cement the government’s strategy for overcoming a recession, investors said. Whoever wins will face a U.S. economy battered by declining corporate profits and the highest unemployment in five years. Concern that $680 billion in bank writedowns will halt growth pushed the S&P 500 down 17 percent last month, the most since 1987, and sent corporate bonds to their worst return in 32 years.

“We’re finally getting all this uncertainty surrounding the election behind us,” said Jeffrey Kleintop, chief market strategist at LPL Financial, which has $274 billion under management. “The market is feeling like there’s finally an outcome. We’re finally putting behind us a lot of the worries that have plagued the market.”

The S&P 500’s rally, its biggest during a presidential vote since the New York Exchange first opened for Election Day in 1984, brought its gain since reaching a five-year low on Oct. 27 to 18 percent. Money-market rates fell for a 17th day, helping push Europe’s Dow Jones Stoxx 600 Index up 4.5 percent.

Early Returns

Obama received Vermont’s three votes, CNN, ABC, CBS and Fox said after polls closed. McCain won Kentucky, based network projections. Two of the biggest battleground states in the election, Virginia and Indiana, were too close to call based on initial returns after the polls closed, the networks said.

The energy-weighted Standard & Poor’s GSCI Index of 24 commodities jumped 7.5 percent to 467.26, the biggest one-day gain since it was created in 1970. The Reuters/Jefferies CRB Index gained 5.3 percent. Crude oil jumped as much as 12 percent, gold rose the most in six weeks and corn hit a three-week high.

Stocks and commodities plunged globally since last year as a nationwide decline in U.S. home prices spurred record foreclosures and saddled banks with bad mortgage loans. Money markets seized up, sending the so-called TED spread, a gauge of credit-market stress, to 4.64 percentage points Oct. 10, the highest level on record.

Steepest Drop

The S&P 500’s drop since its peak is the steepest for a comparable period since it declined 43 percent in the 13 months ended in October 1974, according to data compiled by Bloomberg. The MSCI World Index’s 37 percent retreat is its worst since the measure began in 1970.

Investment grade corporate bonds lost 7.4 percent in October, their worst month as measured by Merrill Lynch & Co.‘s bond indexes since the firm began compiling monthly data on the debt in 1976. The spread between investment grade company bonds and Treasury debt of similar maturity is the widest since 1932, according to Moody’s Investors Service.

S&P 500 companies are on pace for their fifth straight quarter of declining profits, with companies from Texas Instruments Inc. to Freeport-McMoRan Copper & Gold Inc. reporting earnings and revenue that failed to meet analysts’ estimates.

Earnings are down 10.4 percent for the 392 companies that have reported third-quarter results so far. The U.S. economy contracted 0.3 percent in the July-September period, and growth is expected to slow to 1.15 percent in 2009 from 1.6 percent this year, economists’ estimates compiled by Bloomberg show.

‘Slow-Motion Crash’

“October was a slow-motion crash,” said Joseph Keating, chief investment officer at RBC Private Asset Management in Birmingham, Alabama, who oversees $3 billion.

Credit markets started to loosen up as Treasury Secretary Henry Paulson began deploying $700 billion to recapitalize banks and purchase mortgage-related securities.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 15 basis points to 2.71 percent today, the lowest level in almost five months, data from the British Bankers’ Association showed.

“You’re starting to work off a lot of the risk parameters,” said Andrew Brenner, co-head of structured products in New York at MF Global Inc. “Having this election behind us, I think the country will be much more optimistic.”

After pulling ahead of Obama in some polls following the Republican National Convention in the first week of September, McCain’s support slid as the financial crisis deepened, with voters considering Obama better able to manage the economy.

Democratic Edge?

Should either party have an edge in reviving the stock market, history suggests it is the Democrats.

Since 1928, the S&P 500 climbed 9.3 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of six Democrats from Franklin D. Roosevelt to Bill Clinton.

Only once did the benchmark for American equities decline, after Jimmy Carter‘s victory in 1976.

Among the six newly elected Republicans, five -- including Herbert Hoover, Richard Nixon and George W. Bush -- preceded stock-market declines, with a median retreat of 4.3 percent for the group, data compiled by Bloomberg show. The data excludes incumbents that won re-election.

Overall, the S&P 500 generated a median 62 percent advance from the time a Democrat is elected in November or elevated from the vice presidency until the next president is chosen. For Republicans, the gain is 28 percent.

History may not be an accurate indicator this time.

“In a normal year, you would expect some kind of relief rally after the election is over with, just because we won’t be talking about this anymore,” said Brian Barish, the Denver-based president of Cambiar Investors LLC, which oversees about $6 billion. “But I would throw in that there’s been nothing normal about 2008.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net