Stocks trade in narrow range ahead of election

NEW YORK — Wall Street has ended the calmest session in recent memory with a mixed performance as investors looked past a weak reading on the manufacturing sector and focused on the election.

At the close, the Dow Jones industrial average fell 5.18 to 9319.83, having traded in a range of just 132 points — well below October's average daily swing of 594 points.

Broader stock indicators were mixed. The Standard & Poor's 500 index fell 2.45 to 966.30, while the Nasdaq composite index rose 5.38 to 1,726.33.

Stocks showed no lasting impact from the Institute for Supply Management report that its measure of U.S. manufacturing activity fell last month to its lowest level in 26 years as credit conditions tightened and disruptions remained from Hurricane Ike.

While trading was quiet, including the often volatile final hour, the calm doesn't necessarily suggest stocks have carved a definitive bottom; investors likely won't make big moves ahead of the election outcome.

A separate report showed construction spending fell by a smaller-than-expected amount in September as a rebound in nonresidential activity helped offset further weakness in home building. The Commerce Department said construction spending fell by 0.3 percent in September, less than the 0.8 percent decline many economists expected.

And major auto companies reported expected weak sales for the month of October today.

The data, particularly on manufacturing, support the growing belief that the economy is in recession, hurt by a drop in lending and slower overall spending. But with the Dow having tumbled more than 14 percent in October — its worst month in 21 years — the market priced in a significant falloff in economic activity. Wall Street must now determine whether the selloff in stocks is adequate, not enough or overdone.

Stephen Massocca, co-chief executive of Pacific Growth Equities, said the economic readings weren't a surprise given the hits the economy has taken from the evaporation of lending since September. He said Wall Street's tepid reaction also reflects the market's process of forming a bottom after its sell-off. Investors are also waiting to make big bets until after the election, he said.

"What we've seen was a rally last week taking a dire depression off the table, and I think now what we have is a severe recession," he said. "By and large, the economy is bad, but it's not as bad as many people think it is. There are still people going to work every day.

"With the election tomorrow, obviously people probably want to wait and see what happens there. I think that's probably holding people back," Massocca said.

Trading had been expected to remain thin as many investors were sitting on the sidelines ahead of the election. Many analysts have said that in general, neither candidate is more favored than the other on Wall Street, but investors are eager to put the uncertainty behind them.

John Dorfman, portfolio manager of the Dorfman Value Fund, noted that election years tend to be strong regardless of which party is in control of the White House and that even with a difficult economy the market has priced in a tough recession.

"I think we are groping for a bottom here and there is often a relief really after the election is resolved," he said.

Given how far the stock market has already tumbled, analysts believe the market is showing signs of bottoming out. Last month, for all its problems, did end with a positive tone, thanks in large part to weeks of gradual improvement in the tight credit markets, but also because mutual funds were finished with selling at the end of their fiscal year. The Dow added 11.3 percent last week, its best weekly performance in 34 years, while the S&P 500 index climbed 10.5 percent.

But Craig Peckham, market strategist at Jefferies & Co., remains cautious. He said the market is still trying to determine how long the slowdown will last and if it's longer than normal slowdowns, which he suspects.

"There continues to be risk to equity values particularly if we have a long-term downturn," said. "I think we probably do end up bouncing around for a while and I think real conviction to the upside or the downside won't come until people get better visibility on 2009."

Peckham contends that if the economy looks to be in for a sustained slowdown it could be difficult for stocks to hold present values and stay above the market's Oct. 10 lows against a stream of dour economic readings.

Also today, a key bank-to-bank lending rate known as Libor was unchanged with Friday's rate of 3.03 percent for three-month dollar loans. A fall in the London Interbank Offered Rate indicates that banks are more willing to lend to one another.

Investors' demand for short-term government debt remained high, however, a sign that they remain cautious. The yield on the three-month Treasury bill, seen as one of the safest assets around, rose only slightly to 0.43 percent from 0.43 percent Friday. A low yield indicates high demand.

The yield on the benchmark 10-year Treasury note fell to 3.91 percent from 3.96 percent late Friday.

Light, sweet crude fell $3.87 to settle at $63.91 a barrel on the New York Mercantile Exchange.