NEW YORK: Wall Street shifts its focus back to the economy after US congressional elections that produced some surprises, but were largely welcomed by investors.
The past week produced moderate gains for the main stock indexes with the market unfazed by the sweep of Congress in Tuesday’s vote by opposition Democrats, who will now control both chambers.
Some analysts said the move could be good for Wall Street by keeping government spending in check, and that the subsequent removal of Defence Secretary Donald Rumsfeld might help lead to a new course in Iraq.
In the week to Friday, the Dow Jones Industrial Average blue-chip index advanced 1.02% to 12,108.43.
The broad-market Standard and Poor’s 500 gained 1.22% to 1,380.90 and the tech-heavy Nasdaq rallied 2.53% to 1,380.90.
“The muted response to the Democrats’ unexpected sweep of both congressional houses was impressive,” said Lynn Reaser at Banc of America Investment Advisors.
“Although some industries could face ‘headline risk,’ as various proposals and bills are debated, the new Democratic leadership will not be able to claim every prize it desires. Democrats lack the 60 votes necessary to block a Republican filibuster in the Senate and the two-thirds vote required to overturn a presidential veto.”
Mace Blicksilver, an analyst at Marblehead Asset Management, said Rumsfeld's ouster at the Pentagon may be a positive.
“The market thinks that maybe it will lead to a resolution sooner in Iraq, which (could) help support consumer confidence,” Blicksilver said.
Marc Pado, market strategist at Cantor Fitzgerald, said the split power in Washington suggests no major economic policy changes from either party.
“Economically, it's not going to make a big difference,” he said.
Pado said Wall Street is now watching closely to see if the US economy, which struggled at a 1.6% growth pace in the third quarter, will manage a so-called “soft landing” without slipping into recession.
“Where the market stands, the psychology is we had discounted a soft landing,” he said.
He said the prevailing wisdom is that “we will have this very nice smooth soft landing and then the economy will pick up a little bit later.”
Pado said this is “the likely scenario but it never goes that smoothly; so what I'm saying is ‘Watch out for the bumps.’ ”
The analyst said that although stocks have held firm, “the bond market is indicating you're in for a hard landing.”
Pado said a key indicator of the health of the US economy will be retail sales for the crucial holiday season.
“We're going to be watching the holiday season like a football game,” he said.
Other analysts said they are cautious following the election results.
Ed McKelvey at Goldman Sachs said the market is pricing in an “immaculate” housing correction - one that does not induce recession – which may be too optimistic.
“It is quite conceivable to us that the contraction in housing activity could ultimately drag the US economy into recession,” he said in a note to clients.
Although he said that “is not our forecast,” he said it is “a downside risk.”
Andrew Busch at BMO Nesbitt Burns said the split power in Washington would be good for bonds by keeping deficit spending in check, mixed for the stock market and “bad for the US dollar.”
But he added that too much posturing by Democrats could be damaging.
It is “hard to be positive for the markets if there are subpoenas, investigations, and acrimony between the legislative and executive branches of government,” Busch said.
Bond prices firmed over the week. The yield on the 10-year Treasury bond eased to 4.586% from 4.715% a week earlier, and that on the 30-year bond dropped to 4.692% against 4.811%. Bond yields and prices move in opposite directions. – AFP