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The front cover of the New Yorker magazine this week said it all: a tiny patch of blue light at the end of a deep, dark tunnel. For Democrats in America, Barack Obama’s victory after eight years of George Bush felt like light at the end of a very long tunnel indeed.
In the stock markets, Obama’s win did not come as too much of a shock, given his healthy lead in the polls. The S&P did see a ‘victory bounce’, rising above 1000 for the first time in several weeks. But the initial euphoria proved short-lived, with markets soon giving up their gains, note Barclays Wealth analysts in a report dated November 12, 2008.
At this point, it would be foolish to draw firm conclusions about what an Obama victory means for the markets. But analysts at Barclays Wealth say they can make some informed guesses.
“Given the state of the US economy, it is likely that we will see another fiscal stimulus package to the tune of $500 billion in the next six months or so. While this would have happened regardless of who won, the form this fiscal package takes will be different under the Democrats – it will be targeted more towards middle- and lower-income families,” add BW analysts.
It is not clear yet how the Democrats will handle the remainder of the TARP bail-out programme. And there will be political pressure on the Democrats to support other areas of the economy, such as the struggling auto sector, not just the financial sector.
“Markets are unlikely to make decisive progress until the tone of the Obama administration becomes clear – we and the markets will watch this closely over the coming weeks,” add BW analysts.
In the US economy, the news is still grim. Data last week suggested that GDP is falling at around 2.5% in the fourth quarter, more evidence that the US is now in recession. Friday’s employment news was even worse than expected, with a shock rise in the unemployment rate to 6.5% from 6.1%.
UK news is also almost uniformly bleak. The service PMI has fallen sharply to its lowest level on record, with weakness particularly visible in the hotel and catering and financial sectors. There was more gloom on house prices, with the latest Halifax survey suggesting that prices are falling at a record year-on-year rate of 13.7%.
All the bad news prompted the Bank of England to surprise even the most aggressive forecasters last week and cut interest rates by 1.5%. This leaves rates in the UK at 3%, the lowest since 1954. The Bank also acknowledged that ‘risks to inflation have shifted decisively to the downside’, leaving the door open for further cuts. We currently expect UK interest rates to fall to 2.25% by the end of 2009, and see a possibility that they could go even lower.
But it’s not all doom and gloom. There are tentative signs that the money markets are starting to thaw, as Libor spreads have fallen further. While markets have continued to struggle – and are still very volatile – shares are still more than 15% up from the lows of late October.
At times like these, a cautious approach is still probably best. But for those willing to take a longer view, the combination of tax relief and interest-rate cuts from policymakers supports our belief that markets will eventually recover. For investors too, there is finally some light at the end of the tunnel.
