Nov. 3 (Bloomberg) -- U.S. stocks fell after drifting between gains and losses before the presidential election, on the worst contraction in manufacturing since 1982 and forecasts that the sagging economy will reduce profits.

Halliburton Co., the second-biggest U.S. oilfield services provider, led a retreat in 35 of 40 energy companies in the Standard & Poor's 500 Index after Goldman Sachs Group Inc. cut the shares to ``neutral'' and oil slid almost $4 a barrel. Walt Disney Co. lost 3.4 percent after Merrill Lynch & Co. said the economic slowdown will hurt theme-park and television income. AT&T Inc. jumped 3.9 percent after Wachovia Corp. said its valuation is ``compelling'' and the stock is ``safe.''

``Investors are all looking for safe spaces,'' said Robert Lutts, president of Cabot Money Management in Boston, which oversees $400 million. ``It's been harder than usual for investors to find those safe areas.''

The S&P 500 lost 2.45 points, or 0.3 percent, to 966.3. The Dow Jones Industrial Average slipped 5.18 points to 9,319.83 after the 30-stock gauge posted its smallest daily swing in two months. The Nasdaq Composite Index increased 5.38, or 0.3 percent, 1,726.33. About the same number of stocks rose as fell on the New York Stock Exchange.

October Slump

The S&P 500 retreated a day after posting its first back- to-back gains in more than a month. The benchmark index for U.S. stocks sank 17 percent in October, its worst month since 1987. Last month's sell-off erased more than $9.5 trillion from the value of stocks worldwide, almost one-third of the total value wiped out this year, as credit-related losses and writedowns by financial firms approached $700 billion.

About 1 billion shares changed hands on the floor of the NYSE, the slowest trading day since the end of August.

Halliburton fell 7.2 percent to $18.36, leading a 2 percent decline in S&P 500 energy companies. The oilfield-services provider was cut to ``neutral'' from ``buy'' at Goldman, which cited ``product risks and valuation'' in a note to clients.

Crude oil fell 5.8 percent to $63.91 after the Institute for Supply Management said manufacturing in the U.S. contracted in October at the fastest pace in 26 years.

Disney lost 87 cents to $25.04. Merrill cut its share-price estimate for the world's largest theme-park operator by 11 percent to $24, saying the company's parks and broadcasting businesses may be hurt by the ``weakening consumer and softening advertising market, respectively.''

General Motors Corp. fell 14 cents to $5.65. The largest U.S. automaker said sales of cars and light trucks tumbled 45 percent in October, which the company called the worst month since World War II.

Earlier gains in benchmark indexes were spurred by a decrease in money market rates.

Libor Declines

The London interbank offered rate, or Libor, that banks charge for three-month loans in dollars dropped 17 basis points to 2.86 percent, the lowest level since the collapse of Lehman Brothers Holdings Inc. on Sept. 15. The rate has declined for 16 straight days, a sign that as much as $3 trillion of emergency funds provided by governments to resuscitate bank lending are working.

S&P 500 companies are on pace for their fifth straight quarter of declining profits, led by financial companies. Earnings are down 9 percent for the 341 companies that have reported third-quarter results so far. Excluding banks, profits rose almost 14 percent.

Companies in the index may earn a combined $61 a share this year and $69 next year, more than 20 percent below the ``bottom- up'' consensus projection from stock analysts, according to Deutsche Bank AG's strategist Binky Chadha. In 2007, profits totaled $87.72 a share.

`Pays to Be Cautious'

``It pays to be cautious relative to the economy, because we don't know how long or deep the recession is going to be,'' said Matthew DiFilippo, director of research at Stewart Capital Advisors LLC in Indiana, Pennsylvania, which manages $1 billion. ``You want to invest in companies that don't have to rely on the kindness of strangers'' by requiring access to credit markets.

AT&T climbed 3.9 percent to $27.81 for the biggest gain in the Dow average. Verizon Communications Inc. added 3.6 percent to $30.75. Wireless subscriber and average revenue per user trends have ``held up'' even as the economy slowed, Jennifer Fritzsche, an analyst at Wachovia, wrote in a note to clients. Both stocks have compelling valuations based on free cash flow and dividend yields, Fritzsche wrote. The Chicago-based analyst predicted that their dividends won't be reduced.

Hartford Financial Services Group Inc. jumped $5.96, or 58 percent, to $16.28 for the biggest advance in the S&P 500 after saying it has enough capital to withstand further market declines. The insurer will have $2 billion more than required to qualify for an AA rating if the S&P 500 is at 900 on Dec. 31, the company said in a statement.

Insurers Rebound

Insurers, the worst performing group in the S&P 500 last week on concern investment losses threaten profits and credit ratings, gained 3.9 percent as a group today. Eight of the 10 biggest gains in the index today were insurers, including Principal Financial Group Inc. and Lincoln National Corp., which added 18 percent and 15 percent respectively.

Nordstrom Inc. fell 9.2 percent to $16.38. Goldman Sachs Group Inc. lowered earnings estimates for the department-store chain to reflect ``a more challenging backdrop for luxury consumer spending over the next several quarters.'' Goldman also reduced estimates for clothing designers Polo Ralph Lauren Corp. and jewelers Tiffany & Co. and Zale Corp.

Consumer Slump

Government data released last week showed consumer spending dropped at a 3.1 percent annual rate in the third quarter, the first decline since 1991 and the biggest since 1980.

Goldman Sachs fell 3.7 percent to $89.09. The biggest U.S. securities firm, which converted to a bank holding company in September to improve its access to capital, is likely to report a fourth-quarter loss, its first since becoming a public company in 1999, Merrill analyst Guy Moszkowski said in a report.

Office Depot Inc. slid the most in the S&P 500, losing 20 percent to $2.88. Credit Suisse Group AG questioned the ``quality'' of the retailer's quarterly results and said the stock is ``expensive'' after more than doubling last week.

Ahead of the U.S. presidential election tomorrow, history indicates that stocks may have a better chance in the first year of a Barack Obama presidency than a John McCain administration.

Since 1900, the Dow average rose 9.8 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of seven Democrats from Woodrow Wilson to Bill Clinton. Only twice did the index drop, after Wilson's victory in 1912 and Jimmy Carter's in 1976.

Polls show Democrat Obama ahead of Republican McCain as the economy looms as the main concern among voters. Obama, 47, widened his lead to 8 percentage points over McCain, 72, in an average of polls released in the last week, according to RealClearPolitics.com.

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: November 3, 2008 16:41 EST