Euphoria ends with a big sell-off
So much for Wall Street’s postelection afterglow.
A day after racking up their largest-ever election-day gains, stock prices crumpled Wednesday as discouraging employment data turned investors’ gaze from Barack Obama’s historic victory to the prosaic realities of a still-sliding economy.
The Dow Jones industrial average skidded almost 500 points -- more than washing out Tuesday’s 305-point advance -- as investors faced the likelihood that daily economic numbers would remain gruesome for months to come.
“People have been kind of pie-eyed because the election took the market’s attention off earnings and the employment situation,” said Chris Johnson, chief executive of Johnson Research Group in Cincinnati. “Now we’re coming out the other side of the election, we know who’s in office and we’re getting smacked in the side of the head. It’s back to reality.”
The sell-off was by far the biggest decline the day after a presidential election. However, it was magnified by the strong rise in stocks leading up to the vote. The Dow had rallied 18% in the six previous trading days.
Obama’s decisive victory didn’t play a part in the market’s slide, because it had long been expected, analysts said. However, the sell-off underscored the scramble taking place across Wall Street as investors attempt to figure out how his presidency would affect business and the economy.
Though Obama outlined the broad contours of his planned economic policies during the race -- including moves that Wall Street typically disdains, such as increases in income and capital-gains taxes on the wealthy -- investors are questioning how much of his agenda he can pursue amid the financial crisis.
Some doubt that Obama will raise taxes early in his presidency -- or that Congress would support him if he tried -- because of fears that such a move would deepen the economic downturn.
“A lot of the election rhetoric will be postponed for 12 to 18 months at a minimum,” said Bruce Bittles, strategist at Robert W. Baird & Co.
Investors want Obama to demonstrate that he is focused on the financial crisis and has “a sense of perspective on the scope of the issue,” said Ed Kerschner, strategist at Citi Global Wealth Management.
Wall Street didn’t make it easier for him Wednesday.
The Dow slumped 486.01 points, or 5%, to 9,139.27. The Standard & Poor’s 500 index fell 52.98 points, or 5.3%, to 952.77 and the Nasdaq composite index tumbled 98.48 points, or 5.5%, to 1,681.64.
Sectors that could be hit hard in a protracted recession -- including financial, consumer discretionary and materials -- all were pounded. Shares of Citigroup Inc. sank 14% while Goldman Sachs Group Inc. fell 8%.
The sell-off was driven partially by fears about mounting layoffs.
A report from a large employment-services firm estimated that U.S. companies slashed 157,000 jobs last month, and another report showed that activity in the services sector -- a broad grouping that encompasses janitors and lawyers -- contracted sharply in October.
Investors are bracing for the government’s monthly unemployment report Friday to show that as many as 200,000 jobs were cut in October -- the worst loss in the 10 consecutive months of reductions.
Investors piled back into the safety of government securities, with the yield on three-month Treasury bills falling to 0.4% from 0.48%.
The credit markets continued to improve as the rate on three-month interbank loans declined to 2.51% from 2.71%.
Among the sectors that could prosper in Obama’s presidency, according to Kerschner, are renewable-energy companies, part of alternative-energy efforts Obama supports; generic drug makers, which would be favored in a universal healthcare plan; and low-end retailers, which could benefit from tax cuts for low-income consumers.
Industries that could suffer include big oil and coal, which could be hit with a windfall profits tax and limits on how much carbon they could emit; the financial sector, which faces a capital-gains tax hike and increased regulation; and luxury goods, which could see wealthy customers cut back to pay higher taxes.
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Industries’ prospects under Obama
Here are industries that are potentially out of favor or are relatively well positioned under an Obama administration:
OUT OF FAVOR
Tobacco: Expansion of the State Children’s Health Insurance Program would be funded by a federal excise tax increase on tobacco products.
Big oil companies: Obama has proposed windfall profits taxes when a barrel of oil is more than $80.
Coal mining: A system of capping and trading carbon emissions would favor natural gas and nuclear power.
Alternative investments: Obama supports taxing carried interest as regular income.
Brokers and asset managers: Would be affected by a higher tax on capital gains.
Credit card companies: Obama has proposed to ban universal defaults and interest on fees.
Multi-line insurance companies: Obama has proposed preventing insurers from overcharging for malpractice insurance.
Tax preparation companies: Obama has proposed simplifying tax filings for middle-class Americans.
Biotech: “Biogenerics,” or generic biotech drugs, would be at a disadvantage.
Managed care: Government intervention poses risks.
Pharmaceuticals: A greater government role in Medicare drug prices is expected.
Upscale retailers: Higher taxes on upper-income groups would be a negative for luxury goods.
Coal-burning utilities: Potentially at risk from a carbon cap-and-trade system.
High-payout utilities: A higher tax on dividends would be a negative for high-payout stocks.
RELATIVELY WELL POSITIONED
Ethanol producers: Obama supports subsidies and tariffs for ethanol.
Nuclear-powered utilities: Well positioned under a carbon cap-and-trade system.
Solar and wind power companies: Obama favors renewable power sources.
Drugstores: What they lose from brand-name pricing pressure they would make up on a movement to generics.
Generic drug makers: Generics would help the government save money under a universal healthcare system.
Low-end retailers: Obama’s tax cuts would benefit primarily those with very low incomes.
Source: Citi Investment Research
