Tuesday, November 07, 2006

Market Update from Novemeber 6, 2006

Standard and Poor's notes "Stocks Stage Pre-Election Rally"

A brace of M&A news lifted major indexes. Analysts think an outright victory by either party could cause a sharp, short-term swing in the market

Stocks finished broadly higher Monday, boosted by some large buyout proposals. The docket for economic data was quiet this session ahead of Tuesday's congressional elections. Big money reportedly flowing in from Europe may also have lifted sentiment, amid indications Republican candidates may be narrowing the gap against their Democratic rivals, says Standard&Poor's Equity Research.

On Monday, the Dow Jones industrial average rose 119.51 points, or 1%, to 12,105.55. The broader Standard&Poor's 500 index added 15.48 points, or 1.13%, to 1,379.78. The tech-heavy Nasdaq composite climbed 35.16 points, or 1.51%, to 2,365.95.

NYSE breadth was decidedly positive, with 25 issues advancing for every 8 declining. Nasdaq breadth was 21-9 positive.

The upcoming election results could impact the markets in the short-term, though fundamentals will ultimately be more important, some analysts say.

"If the Republicans do retain both houses, then the market is likely to have a short-term reaction rally," says Richard Bernstein, chief investment strategist at Merrill Lynch, in a research report. "If the Democrats win both houses, then the market is likely to have a short-term reaction sell off. A split probably has little impact."

A Democratic takeover of one or both chambers of Congress could be good for Treasuries, others say. "As long as the economy continues growing at a reasonable clip, gridlocked government would provide an excellent backdrop for continued improvement in the budget deficit, with any significant new spending programs having little chance of getting past a White House veto and any attempt to extend or make permanent various temporary tax cuts a likely non-starter in a Democratic Congress," note Morgan Stanley economists Ted Wieseman and David Greenlaw. "Gridlock certainly worked wonders in the second half of the 1990s for the budget."

Still, other analysts don't expect the elections to swing the markets much in either direction. "The elections are unlikely to move markets in a big way unless the Republicans manage to maintain control of both Houses of Congress," says Steven Ricchiuto, chief U.S. economist at ABN Amro. "Gridlock will continue to dominate Capitol Hill politics under almost all possible election scenarios, but foreign investor confidence will be shaken if the Republicans hold onto the House." Investors were digesting M&A news Monday. Four Seasons Hotels (FS) received an offer to take the company private for $3.7 billion, or $82 per share in cash.

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