Around the Street: The Election Heats Up, the Economy Cools

With the race finally just a day away, Wall Street economists and strategists give their take on the state of the election and the economy

From Standard & Poor's Equity Research

We're almost there. The U.S. Presidential contest between Senators John McCain (R-Ariz.) and Barack Obama (D-Ill.) marked its final full day on Nov. 3 before U.S. voters headed to the polls on Election Day, and stock market observers pondered the meaning of the race and its potential impact on Wall Street. Competing for investors' attention on Nov. 3 were two economic reports that shed some light on the health of the factory and construction sectors—and the news was gloomy. In particular, a report on manufacturing sector sentiment showed a far greater decline than economists had expected.

BusinessWeek and S&P MarketScope staff compiled some insights on the election and the economy from Wall Street economists and strategists on Nov. 3:

Ryan Brecht, Action Economics

The odds on the Presidential race shifted toward McCain following the Republican convention, widened back in Obama's favor through the Presidential debates and ongoing credit crisis, then narrowed a bit in recent weeks. The situation in both the House and the Senate has persistently favored the Democrats. Futures contracts on the Iowa Electronic Markets (chart) and intrade.com remain priced for an Obama win, matching the opinion polls. Interestingly, the chances for a blockbuster Obama win have softened since mid-October, as futures are now pricing in a 53% vote share for Obama vs. the post-financial crisis peak of 58% seen in the middle of October. The futures contracts suggest the contest may be closer than the wider gap reported in many polls, although the market is still consistent with an Obama win.

Robbert van Batenburg and Wilson Mui, Louis Capital Research

The credit crisis has forced Obama and McCain to put the economy at the center of their campaigns, and both have launched a range of proposals to address this issue.… Obama's plans benefit the domestic carmakers, infrastructure companies, and municipal bonds. Both candidates' mortgage relief plans should benefit low-end homebuilders, while McCain's plans benefit domestic drillers and nuclear fuel companies while punishing ethanol refiners. Beyond the plans to address the credit crisis, health care and taxes are the main issues. Obama's plans hurt the health-care insurers while helping the discount retailers. On balance a McCain victory is considered more favorable to the stock market.

Bruce Bittles, Robert W. Baird & Co.

The powerful downside momentum in the stock market was finally broken last week as the popular averages soared by double digits. The fact that Tuesday's record single-day advance included nearly 18 times more upside volume than downside volume also suggested that momentum now favors the upside. Despite last week's huge rally, stocks remain oversold, with only 5% of the New York Stock Exchange issues trading above their 30- and 50-day moving averages. In addition, sufficient investor fear and skepticism remain to allow for further gains. Although the highly contested election could be an issue this week, historically stocks tend to rally once the votes are counted regardless of the outcome. The largest area of concern is Friday's October jobs report, which could show that more than 200,000 people lost work in October.

Sam Stovall, Standard & Poor's

The S&P 500's price performance during the three calendar months leading up to the Presidential election has in the past been a good predictor of whether the President or his party would be reelected or replaced. An S&P 500 price rise traditionally has predicted the reelection of the incumbent person or party, while a price decline has pointed to a replacement. Since 1928, this election-prognostication technique did an excellent job, in our view, recording a 79% accuracy rate in predicting the reelection of the party in power and an 83% success ratio in calling for a change of party. …Since the S&P 500 has declined 24.7% from July 31, 2008, through Oct. 30, it would be fair to say that the model points to—but does not guarantee—an Obama victory.

Ted Wiseman, Morgan Stanley

The composite [ISM manufacturing] index slipped 4.5 points in October, on the heels of an even sharper drop in September, to the lowest level since September 1982. Up until a couple of months ago, the manufacturing sector was being supported by strength in exports even as domestic demand proved sluggish. However, domestic activity has slackened further and exports are now starting to show some softness. In fact, the 16-point drop in the export orders gauge recorded over the past two months is more than twice as large as any previous decline seen in the 20-year history of this series. An inventory overhang is also starting to become more apparent. The customers inventory index (a gauge of whether stockpiles are perceived to be too high or too low) advanced to 55.0—the highest since the 2001 recession. This is likely to contribute to further declines in orders and production over the coming months. The manufacturing sector is now in the grips of a major recession—and conditions are likely to get a good deal worse before they get any better.