The Standard & Poor's 500 Index has jumped more than 6 percent from its August low two weeks ago with credit being given to some slightly better-than-expected employment figures, an improving credit picture in Europe and a flight out of low yielding bonds into equities.
But some on Wall Street believe another force is driving prices: a Republican Revolution.
The Intrade contract predicting the Republicans long shot chances at actually taking the Senate has increased to as much as 30 percent this September, from a low of about 17 percent last month. The prediction market site, where actual money changes hands, has the Republicans with a more than 70 percent chance of controlling the House, a result already widely expected.
“As the polling numbers extend for the Republicans, look for more equities upside,” said Jon Najarian, co-founder of TradeMonster.com and a ‘Fast Money’ trader. “Just taking the House is a bet on gridlock, which most of your business types will say Amen to. Taking both is a bet on a much higher percentage of Dems willing crossover and that means friendlier to business.”
On Wednesday, President Obama unveiled the next step in his economic recovery plan, including incentives for business to create plants here in the U.S. and increased spending on infrastructure. Investors shrugged the plan off, giving it little chance of going through before the elections. Obama ruled out any extension of the Bush-era tax cuts for those making more than 250,000 a year.
“This is the catalyst for higher equity prices,” said Veracruz LLC’s Steve Cortes, who sold his safe haven gold trade on the chances of a big Republican win. “The most business-unfriendly DC in decades is about to change dramatically. The Tea Party is a real force and mid-term elections are about turnout.”
The year following mid-term elections is usually good for stocks. The S&P 500 returns, on average, 19.4 percent in the third year of the Presidential cycle, the best of the four, according to data from Strategas Research Partners.