Jeff Cox @ CNBC
With just 100 days left until the U.S. presidential election, investors are beginning to make bigger bets on which candidate will carry the day.
One analysis concludes that last week’s sharp three-day market surge can only mean that Wall Street is banking on a victory from Republican Mitt Romney.
That’s the logical interpretation one can draw from a rally amid conditions that otherwise would demand a selloff, Morgan Stanley chief U.S. equity strategist Adam S. Parker said in an analysis that asserts there is no other reason now to like stocks than a Romney win.
“The problem is that it’s impossible to be bullish and right for the right reasons,” Parker said in a note to clients in which he reiterated his 2012 price target for the Standard & Poor’s 500 at 1,214, which would mark a 12 percent drop from the current level.
“Nearly every day someone expresses surprise that our base case is for the equity market to be down by 10-15 percent. Why is this so hard to believe? The market has had eight 10 percent down moves in the last 12 years,” Parker said. “We think a better question is why more people don’t forecast that the next 10-15 percent move is down than up?”
Parker cites weak earnings and the likelihood that central bankers won’t be able to continue to save the day as bolstering the case against equities. The near-zero interest rate policies from the Federal Reserve and now the European Central Bank, in fact, are weakening the outlook for stock multiples, he said.
The conclusion Parker draws is that investors are betting that Romney will unseat President Obama and bring a more business-friendly environment to the White House.
“At the end of the day, we are not really worried that Europe is going to be ‘solved’ or that its economy will strongly grow. We also don’t think strong corporate profitability relative to expectations will save the day,” he said.
“To us, the biggest bull case for US equities is based on the huge cash balances and the potential belief that they will be more actively and productively deployed. The biggest possibility here would be Romney winning the presidential election.”
I’m not sure I’d want that particular analyst placing bets for me. A three-day market surge could relate to a lot of different things. I doubt if an uncertain election outcome still 3 months in the future is one of them.
I’ll propose a politically motivated crank theory of my own: The market could take a serious dive if Romney is elected, because many small investors would fear risking more of their wealth in an increasingly unregulated market. People already suspect that the game is rigged in favor of the house and the biggest players.
A chart: Stock market performance under various U.S. presidents
Market is up on anticipated hopes for a QE3 and upcoming fed and ECB policies. It’s the usual…. they get excited over government and central band injections, and ignore the slowing global economies. But at least while the free ride lasts, those with pensions, investments and 401Ks in the market aren’t watching it recede, along with the GDP and job creation.