Stocks rose in the biggest Election Day rally ever yesterday, as investors looked forward to the end of the uncertainty surrounding the long fight for Capital Hill. This was exceptional because Election Day was a stock market holiday before 1984, according to Standard & Poor’s.
Democrat Barack Obama defeated Republican John McCain and made history in the United States!
The rally pushed stocks higher by 3 to 4% in the United States and Canada posted gains on the higher end of the range. Stocks are now trading at their early October levels with the S&P 500 crossing the key 1,000 milestone for the first time since October 13. The major stock indices are all up between 15 and 20% from their intra day low points in October.
Oil prices jumped more than 10% yesterday on signs Saudi Arabia and other OPEC members had made cuts in crude exports (they gave back some of those gains this morning in advance of the gasoline inventory data that will be released later this week).
Optimism of the Obama win faded in light of the huge economic challenges ahead this morning. European data was weak with EU PMI Service hitting record lows (level of manufacturing activity) and UK Industrial and Manufacturing Production equally bad. In short, we are in a global recession and it will take some time to “get out of the current slump.”
There is room for optimism since interbank lending rates fell to their lowest in five months as the sector tried to put the worst of the credit crisis behind them and the various “bail out” or “recovery plans” take hold. However, the overnight deposits at the European Central Bank hit a record high. In short, banks are still “hoarding” their cash and not lending to businesses and to consumers (this will need to change). Earlier in the week the Federal Reserve in the United States said that “most U.S. and foreign banks had tightened lending standards across the board in the last three months.”
In an attempt to deal with the recession, Australia cut interest rates sharply yesterday with a bigger than expected 0.75% rate cut. The United States, China and Japan cut interest rates last week and Britain and the European Central Bank are expected to follow suit tomorrow. Each of the big developed economies now are either in a severe recession or well on the way (according to stock markets).
What will Barack Obama need to accomplish in the short-term in order to assist us in getting out of this mess?
1. Get people on the same page and “pulling” together (set expectations)
2. Stabilize credit markets and put a floor on the housing market
3. Stabilize employment (especially in the auto industry)
4. Avoid raising taxes
5. Set reasonable expectations and “buy time” – this is not a short-term fix
In the interim, stay diversified since the levels of ‘fear’ are still elevated and justifiable, but take comfort in the fact that things are not likely going to get worse in this very chaotic time.
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
