Republican Revolution Behind Stock Rally?

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 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.

“Perhaps sensing a change in political winds, stocks have historically done much better in the second half of mid-term election years than they have in the first,” said Strategas’ Jason Trennert, one of the top equity strategists on Wall Street, in a note. “The odds of the Senate switching hands are far lower, suggesting the possibility of an upside surprise for the Republicans, and possibly the markets, this fall.”

Trennert also points out that the House has never switched hands without the Senate also following suit.

To be sure, some traders have their doubts that this is the real reason behind the rally.

“I want badly to believe that a conservative government on the horizon is the reason for the buoyant stock market and I think it is a small factor,” said Jim Iuorio, trader with TJM Institutional Services. “But the bigger reason in my mind is an overbought condition in the Treasury bond market flushing out some of the weaker hands and sending a `risk on’ signal to the rest of the markets.”

Also, while the Intrade markets have a pretty good track record of calling past races, the market for these contracts are not as liquid as something like an equity market.

At the very least, investors seem to be sensing that a change in attitude in Washington is afoot and it may lead to Congress as a whole leaning towards policies the market will reward.

“Not sure if we're far along enough in the process to really call this with any certainty, but I think the market is beginning to price the bigger win in,” said Patty Edwards, founder of money management firm Storehouse Partners.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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