Stocks Rally as Election Uncertainty Lifts

Indexes advanced Tuesday on easing of investors' anxiety about the presidential race outcome, while some positive earnings overshadowed weaker factory orders

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U.S. stocks finished solidly higher Tuesday as Wall Street celebrated the end of the U.S. presidential campaign. Traders focused on better than expected earnings from Mastercard (MA) and Archer-Daniels-Midland (ADM), which eclipsed a report that showed U.S. factory orders declining 2.5% in September. Investors also seemed to take remarks by Dallas Fed President Richard Fisher that the U.S. is "navigating the mother of all financial storms" in stride.

Market players were also encouraged by reports of a possible expansion of the government's Troubled Asset Relief Program, lower Libor rates, and the Australia Central Bank's decision to cut rates 75 basis points to 5.25%. The European Central Bank and Bank of England are expected to cut rates Thursday.

Wall Street, like the rest of the world, was awaiting the results of the U.S. elections, especially the presidential contest between Senators John McCain (R-Ariz.) and Barack Obama (D-Ill.). Polls say Democrats should score well on Election Day, notes S&P MarketScope.

On Tuesday, the Dow Jones industrial average jumped 305.45 points to end at 9,625.28. The broader S&P 500 index added 39.45 points to close at 1,005.75. The tech-heavy Nasdaq composite index gained 53.79 points to finish at 1,780.12.

On the New York Stock Exchange, 25 stocks were higher in price for every seven that declined. The ratio on the Nasdaq was 18-10 positive amid slow trading.

Bonds were higher Tuesday. The dollar index was lower. Gold futures were soaring. Crude oil futures and energy stocks were up on reports that Saudi Arabia and other OPEC members were actually cutting production.

European stocks rallied, with London stocks up 4.42%, Frankfurt higher by 5.00%, and Paris climbing 4.62%. Asian markets finished mixed, with Tokyo stocks soaring 6.27%, Hong Kong stocks edging higher by 0.28%, and Shanghai stocks falling 0.76%.

Doug Roberts, chief investment strategist at ChannelCapitalResearch.com in Shrewsbury, N.J., called the pre-election gains a relief rally that stemmed from much of the uncertainty around the next administration being lifted, as well as some short covering in sectors such as oil based on nervousness about new policies tat may be implemented.

"It's not so much who wins [although] it looks like right now Obama is going to win, but when you’re in a kind of crisis mode where everybody is wondering [now that] we’ve done TARP, we’ve done the commercial paper funding facility, we’ve done rates cuts, what’s next?" says Roberts. "The next president. So the market is breathing a sigh of relief that at least some of these problems will be addressed."

While he believes the rally could be sustained, it may also be undermined if Demnocrats win nine or more Senate seats, as that would give them a 60-seat majority and the power to enact laws even without a Democratic president's support, and certainly without the check and balances from the Republican minority.

In economic news Tuesday, U.S. factory orders plunged 2.5% in September. The reading was much weaker than the -1.8% expected, and comes after a revised 4.3% decline in August (-4.0% before). The 0.8% rise in durable goods orders for September was revised up to 0.9%. Transportation orders rebounded 6.5% after a 9.4% drop in August. Excluding transportation, orders fell 3.7% after falling 3.6% in August. Nondefense capital goods orders excluding aircraft fell 1.5% after a 2.3% decline. Shipments declined 2.8% and inventories were down 0.7%, pushing the inventory-shipment ratio up to 1.29.

The International Council of Shopping Centers and Goldman Sachs chain store index rose 0,6% in the week ended Nov. 1 after rising 0.5% the week before. On a year-over-year basis, sales grew by 0.9% after rising 1.3% the week before.

In a speech Tuesday, Dallas Federal Reserve president Richard Fisher said the Fed is facing the "mother of all financial storms". He suggested fiscal and regulatory changes were needed to help boost the economy. He also stated that inflation momentum has been frozen in its tracks by the slowdown in the economy.

The Treasury Dept. is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success, according to people familiar with the matter cited in a Wall Street Journal report. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co.'s (GE) GE Capital unit, CIT Group Inc. (CIT), and others, these people said. The possible expansion shows how much Treasury's rescue plan has morphed since it was first proposed in September.

Among companies reporting earnings, Mastercard reported a third-quarter loss of $1.49 a share (including special items), vs. a profit of $2.31 a share a year ago, despite 24% higher revenue. Excluding an after-tax charge related to an antitrust litigation settlement, the latest earnings were $2.47 a share, beating the Street's forecast of $2.25. Standard & Poor's Equity Research maintained its hold rating on the stock.

UBS AG (UBS) reported third quarter earnings per share (EPS) from continuing operations of 0.09 Swiss francs, vs. a 0.45 Swiss francs loss per share, despite a 14% drop in interest income. UBS expects conditions seen at beginning of the fourth quarter will continue to affect clients' assets, and therefore its fee-earning businesses. It also notes fourth-quarter results will be impacted by a possible reversal of its own credit gains, and loss on the equity in the fund to be controlled by the Swiss National Bank.

The Financial Times reports Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS), State Street (STT), and Wells Fargo (WFC) will pledge not to use the recent $125 billion cash infusion from the US government to pay bankers' bonuses in an effort to defuse the mounting political furor over compensation at battered financial groups.