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Has Wall Street Priced In a Presidential Winner?

Stocks typically do well in a presidential election year, and in '08 some of Wall Street's most important strategists and economists have already placed bets on the winner.

The question, though, is whether that potential victory is already being taken into account by the stock market. Some, like BlackRock's Global Chief Investment Officer Robert Doll believe it is, but others say the reaction is yet to come.

Traders on the floor of the New York Stock Exchange gather around a Bank of America trading post just prior to the announcement by the Federal Reserve that it had raised a key interest rate for the twelfth consecutive time, Tuesday, November 1, 2005. The Federal Reserve, still concerned about inflation, raised the interest rate to the highest level in more than four years and signaled more increases are likely.  (AP Photo/Henny Ray Abrams)
Henny Ray Abrams
Traders on the floor of the New York Stock Exchange gather around a Bank of America trading post just prior to the announcement by the Federal Reserve that it had raised a key interest rate for the twelfth consecutive time, Tuesday, November 1, 2005. The Federal Reserve, still concerned about inflation, raised the interest rate to the highest level in more than four years and signaled more increases are likely. (AP Photo/Henny Ray Abrams)

"The markets, in their infinite wisdom, have figured out that tax rates are going to go up, and that it's probably going to be a Democrat, and it's probably going to be Hillary," Doll said in a telephone interview Wednesday. Doll expects stocks to end the year higher, barring a recession -- but he made clear he does not see a recession on the horizon.

On Thursday, CNBC's Trillion Dollar Survey resultsshowed that Wall Street broadly believes N.Y. Sen. Hillary Clinton will be the successful candidate. About 80 percent of the 60 some strategists and economists who responded say they expect the Democratic party to win the White House in 2008 and expect Clinton will be the Democrat's candidate. But that group's preferred party is the Republican party, according to 60 percent of those who took the survey. The likely Republican candidate is Mitt Romney, according to 50 percent.

"Nobody believes that taxes are going to stay as low as they are on capital gains and dividends," Doll said. The two big issues of the election, regardless of the winner, are taxes and trade, he said. Republicans and Democrats alike will likely propose a tax bill for 2009, and taxes would not increase any more with Clinton in the White House than any other Democrat.

"I don't think they've thought through the likelihood of significant gains by Democrats in the House and Senate, which I think are likely, and a Hillary Clinton Presidency. That's quite a combination," said Valliere.

Daniel Clifton, head of policy research at Strategas Partners, said he doesn't believe the market is acting as if there's a clear winner. "What historically happens in the first half of the year is the election will loom over the market. There will be a great degree of uncertainty because you don't know who is going to win," he said.

"It's really a question of when the election winner is clear," and before that point the market's returns could be "middling," Clifton said.

Iowa's caucuses will obviously not establish the clear winner -- or maybe not even the lead candidate for either party. But the market could focus on a victor ahead of election day if one candidate begins to dominate, he said.

"You'll probably get a 10 to 15 percent return from when the winner becomes clear," he said. If there is recession though, there could be a very different market outcome.

The strategists and economists in CNBC's survey mostly expect the S&P 500 to finish 2008 higher. Some 56 percent see gains of more than 8 percent. The respondents also rated the election as the top business story of the year.

Taxes are Key

Valliere said the Bush tax cuts for capital gains and dividends, which expire in 2010, would be likely targets for revision. Capital gains could rise from their current 15 percent rate and dividends could revert back to being taxed as ordinary income. "These are big implications for the market. There could be a significant change in taxes," he said.

Valliere says its likely a significant tax change would come in 2009. "Even a Republican is going to be boxed into a corner and forced to the bargaining table. To me, that's the big story," he said.

"Within the Democratic party ... there's this passion to raise taxes on the wealthy," he said. The expectations for a change in 2009 could result in some tax-related selling in 2008 as investors move ahead of expected changes. One negative implication for the market could be tax-related selling in the 2008 calendar year as investors act to avoid higher tax rates in 2009.

Clifton said if the market truly was pricing for a Clinton victory, it would show other signs of activity related to dividend and capital gains taxes. For instance, companies might start issuing special dividends and pushing ahead with mergers and acquisitions.

Dow Jones Industrial Average:

There have been 27 Presidential elections since the start of the Dow in 1896.

There have been 12 Democratic and 15 Republican victories over that period, with the Oval Office switching parties 10 times.

On average, the Dow has risen 7.55 percent between New Year's and election day.

Statistically, the Dow performs best in the third year of any presidential term. In election years the Dow still has done well historically, with a rough average of a 9 percent gain, according to CNBC data. In the third year of a term, the Dow averaged more than 12 percent.

Since 1896, the Dow has been up 19 times during Presidential election years and down only eight times.