November 3, 2010

Election 2010, Markets: Gridlock May Lead to a 'Relief Rally'

The election results were big but expected, traders were really waiting for news from the Fed about quantitative easing

Markets at home and abroad meandered around on Wednesday, digesting the news of a Republican majority in the U.S. House and more influence in the Senate, and the Federal Reserve's QE announcement. 

“The expected political change implies gridlock in Washington, D.C., and many businesses in this country do not see that as a bad thing,” explained John Derrick, director of research and portfolio manager, of U.S. Global Investors, in a phone interview.

“We may not see a large uptick if the political expectations are being met,” Derrick added, but we could see a bit of a ‘relief rally.’ ”

The FTSE 100 closed down 8.46 points, or 0.15%, to 5,748.97, while the Nikkei ticked up 5.26 points, to close at 9,159.98.

After the Federal Reserve's announcement Wednesday afternoon of its QE plan to buy $600 billion in debt, the three major U.S. indexes jumped up and down but ended only marginally higher. The Dow closed at 11,215.13, its highest level since just before the financial crisis erupted in Sept. 2008.

On Tuesday, U.S. stock index futures edged up late in the afternoon but then weakened in the evening. The major indexes traded up Tuesday, with the Dow rising 64.10 points, or 0.6%, to end at 11,188.72; the S&P 500 gaining 9.19 points, or 0.8%, to end at 1,193.57; and the Nasdaq moving up 28.68 points, or 1.1%, to end at 2,533.52.

The S&P 500 index has gained almost 14% since September, analysts say.

Still, the indexes could see more upside as U.S. tax policies become clearer, Derrick says. “If there are signs that the tax cuts are likely to be extended for another year, this could be very positive for the markets,” he said.

Signs that economic growth, as measured by GDP, could move up 3% in 2011 rather than the expected 2% would also give the stock markets a nice push, according to Derrick.

“The flipside is, if there is more uncertainty over tax policy, we’ll see a nervous market,” the portfolio manager said.

Gold Prices

Gold should benefit in the long-term from the Fed's QE plan because it was above the anticipated $500 billion mark that would likely weaken the dollar, according to Derrick. After the announcement, gold, however, was still down for the day, off nearly 1.4%, to $1,337.50 an ounce.

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