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Wall Street Already Betting On Who Wins in November

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.

Mitt Romney and Barack Obama
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Mitt Romney and Barack Obama

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 Reserveand 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 Obamaand 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."

The conclusion, though, is not completely supported, either by past or present conditions.

Historically, moves higher in the market usually mean the incumbent president is likely to win, while sell-offs simply indicate the challenger is favored, according to research from S&P/Capital IQ.

The markets, however, go by their own logic.

"Many investors I have spoken with believe that if the S&P 500 should rise between July 31 and Oct. 31, it would signal an impending Romney victory," said Sam Stovall, chief equity strategist at S&P.

"The recovering market would be a sign that the perceived anti-Wall Street policies of the current administration will soon come to an end, as the incumbent would be replaced and that a plurality on the Potomac might even return as a result of the early November outcome," he added. "Unfortunately for these presumptive prognosticators, history indicates, but does not guarantee, that the opposite has usually been true."

The trend, Stovall said, has been accurate 82 percent of the time over the past century.

Present indications, meanwhile, paint a mixed picture.

Recent polls have the race in nearly a dead heat, with the Real Clear Politicsconsensus putting Obama up by less than 2 percentage points.

At the same time, Intrade, the online forum that allows investors to bet on outcomes of various events, has Obama with a firm 57 percent likelihood of re-election.

Put together, the picture is one of uncertainty and an electorate and investor population that has not made up its mind yet about who should be the next president.

"Things like the European sovereign debt crisis, for example, or the pending fiscal cliff are probably first and foremost in the market's mind. A slowing global economy probably falls in there as well," said Art Hogan, managing director and head of product strategy at Lazard Capital Markets in New York. "It's hard to know how much the election process is playing into that."

Hogan expects Wall Street will cast a decisive vote, but probably isn't ready yet.

"The fact that the election is so close now speaks volumes about how much we are concerned about the current economic situation in the United States," he said. "The conventional wisdom indicates that Wall Street would rather see a fiscal conservative Republican win. That's sort of a free-market capitalist concept, except for the fact that history doesn't play that out. What's typically better for Wall Street is some sort of gridlock."

With the polls showing a race still ripe for the taking, the economic picture of the last four years and the next four years likely will come down to 100 days' worth of news.

"Right now the markets are just dealing with what's at hand," said Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J. "The market can only handle so many things at one time."

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