Worst Stock, Bond Markets in Three Decades Hang Over Elections

By Michael Patterson and Daniel Kruger

Nov. 4 (Bloomberg) -- U.S. voters are heading to the polls with stock and bond markets mired in the worst slump in three decades.

The Standard & Poor's 500 Index dropped farther and faster than any time since the administration of Gerald Ford, losing 38 percent from an all-time high last year. Corporate bonds slid the most last month since in at least 32 years as bank losses topped $680 billion and consumer confidence hit an all-time low.

The winner between Democrat Barack Obama, who leads in national polls, and Republican John McCain must contend with an economy crippled by declining corporate profits and the highest unemployment in five years. Concern growth is slowing sent the S&P 500 down 17 percent last month, the most since 1987.

``October was a slow-motion crash,'` said Joseph Keating, chief investment officer at RBC Private Asset Management in Birmingham, Alabama, who oversees $3 billion. ``The economic reality is going to set in for whichever gentleman is elected. They'll both be looking at the worst recession since 1980.''

Stocks plunged 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 an all- time high last month.

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.

Profits, Jobs

Shares fell as companies in the S&P 500 have reported an average profit decrease of 13 percent for the third quarter, the fifth consecutive retreat. The U.S. unemployment rate held at 6.1 percent in September, the highest since September 2003.

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.

``It's particularly likely that this new president can't do much, because they're going to get so saddled with the things they inherit,'' said Kenneth Fisher, who helps oversee over $32 billion as chief executive officer of Fisher Investments Inc. ``Presidents can only do so many things at once.''

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

Bank Rates

The London interbank offered rate, or Libor, that banks charge one another for three-month loans in U.S. currency slid 17 basis points to 2.86 percent yesterday, data from the British Bankers' Association showed. It hasn't been as low since the failure of New York-based securities firm Lehman Brothers Holdings Inc. on Sept. 15.

``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.

Obama has an average lead of 7 percentage points over McCain, according to surveys compiled by Real Clear Politics. Obama has been ahead between 5 and 8 points since the beginning of October, the political Web site said.

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

Democratic Difference

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