A strong rally for stock markets is likely in the fourth quarter but the US economy faces sluggish growth, especially if the Bush tax cuts are not rolled over, Bob Parker, a senior adviser at Credit Suisse, told CNBC Friday.
Corporate and investor cash is at a record high, because of worries of either a double-dip recession or fears of the world going into deflation, he said. "If you're in a period of deflation, sitting on a cash mountain is a wise thing to do. But we are not going into deflation," Parker said.
November mid-term elections in the US are another factor compounding the chances of a stock market rally, because historically "there's a clear pattern of stock markets rallying around mid-term elections," he explained.
"My central case is that we will have quite a strong fourth-quarter equity rally," Parker said.
If interest rates remain low, as they are predicted to, the cash on the sidelines is going to shift into assets, a phenomenon already visible in the mergers and acquisitions cycle, according to Parker.
He predicted economic growth of 2 percent for the US for this year and of 2.5 percent for next year, but with a big caveat: if the Bush tax cuts are not rolled over, "that would be a fiscal shock to the economy."
"If they don't roll over, growth next year comes down to 1 percent," Parker warned.
His view is in contrast to that expressed by White House economic advisor Larry Summers, who in an interview with CNBC Thursday signaled that he did not consider the cuts crucial for economic growth.
Parker said it is worrying that in the US more than 50 percent of the unemployed have been so for over 15 months and this is becoming "a big drag on the economy."
"We could have a very miserable two to three years in the US," he said.
In southern Europe, economic conditions will remain difficult going into 2012, but Germany is in good health and may record growth of more than 3 percent next year, Parker said.
Chinese stocks look attractive because they fell 20 percent year-to-date and speculative flows are now trying to go back into the market, he said.
Sectors will perform differently, with financials underperforming while the health-care sector will outperform the broader market.
The technology sector is also likely to do well, as companies will spend on technology next year, he said.
"I think it's far too early to take profits in the tech sector," Parker said.