With all the speculation on the latest moves in the market, a Morgan Stanley U.S. Equity Strategist believes that the three straight days of rallies in the stock market last week "can only mean one thing"-that the market is betting on a Romney victory:
"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 (^GSPC) 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 Reserve and 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 Obama and 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."
http://finance.yahoo.com/news/wall-street-already-betting-wins-191242763.html
So the markets are betting on a Romney win? The trouble with this is that historical data doesn't confirm it at all.
"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."
There probably are a lot of people like this MS analyst who think this. Yet reading them as market sentiment would be the error of fallacy of composition. The correlation between a rising stock market and an incumbency win is pretty strong.
"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."
I also can't help but think of the analysis of Jared Bernstein that showed that Wall Street actually does better during Democratic Administrations.
Anyway all this sounds like good news to me as a partisan Obama Democrat. It is interesting though. Two things are:
1. Why do markets do better under Democratic Administrations?
2. Why does Wall Street always believe the opposite?
By a different indicator, Wall Street is betting on an Obama victory:
"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."
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