Obama's Bull Market Intact as Midterm Gridlock Signals Gains

Bloomberg.com:

Growing dissatisfaction with U.S. President Barack Obama before this year’s elections is good news for stock investors, if history is any guide.

The Standard & Poor’s 500 Index has surged 48 percent on average starting in the second year of each U.S. presidential term, measured from its lowest level through the high the next year, according to data going back to 1928 compiled by Bloomberg. That compares with trough-to-peak gains of 38 percent in other years.

An advance this year would come after Obama already presided over the biggest rally during the start of a presidency since Franklin D. Roosevelt in the 1930s. Bets on Intrade show a 54 percent chance Republicans will take control of the House, enabling them to block Obama’s policies. That may help prevent a bear market after equities tumbled as much as 16 percent in the past two months, says billionaire Kenneth Fisher.

“I envision a rally from before the midterm elections,” said Fisher, who oversees $35 billion in Woodside, California, as chief executive officer of Fisher Investments. “Markets love gridlock. What the market wants to see is no change: less legislation that engages in changes in taxes, spending, regulation or property rights.”

The S&P 500 slipped 1.2 percent to 1,064.88 last week, extending its 2010 loss to 4.5 percent, after revenue at Charlotte, North Carolina-based Bank of America Corp. and General Electric Co. in Fairfield, Connecticut, trailed analysts’ estimates. Futures on the gauge rose 0.2 percent to 1,065.20 as of 1:20 p.m. in Hong Kong.

Republican Majority

The benchmark measure for U.S. equities has advanced 15 percent on average in years when there was a Democratic president and Republican majority in Congress, the most of any combination, according to Strategas Research Partners.

Republicans will gain 40 to 50 House seats in November, based on historical trends including times when presidential support falls to Obama’s current level, New York-based Strategas said. Obama has a job approval rating of 52 percent, according to a Bloomberg National Poll of 1,004 U.S. adults.

Odds that Democrats will lose their Senate majority are 18 percent, according to Intrade, a prediction market based in Dublin. Republicans must win at least 40 seats in the House and 10 in the Senate during the Nov. 2 elections to take control.

“The current thinking is that the administration is punitive towards business and any erosion of power in Congress would create an environment that’s less punitive,” said Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, which oversees $17 billion. “From the standpoint of a lot of investors, that would certainly help equities.”

Bush, Clinton

The S&P 500 gained 6.7 percent in the 12 months after the 2006 midterm election, when Republicans and President George W. Bush lost control of both houses of Congress. In the 1994 congressional elections under President Bill Clinton, Democrats gave up their majority in the House and Senate. That preceded the S&P 500’s 34 percent surge in 1995, the biggest in 37 years, data compiled by Bloomberg show.

Losing seats may make it harder for Obama to scale back Bush’s tax cuts to boost revenue and pay down the budget deficit. Democrats are seeking to raise taxes on dividends and capital gains and end breaks for Americans earning $250,000 or more. Obama signed the largest change in U.S. health-care policy in 45 years into law in March, enacting a $940 billion plan to extend coverage to tens of millions of uninsured Americans.

‘Uncomfortable’

“The market has been uncomfortable with the pace of the legislative agenda this year,” said John Canally, a Boston- based investment strategist and economist at LPL Financial, which oversees $285 billion. “Republican control of the House could usher in some gridlock and slow the pace. The view of the market is that Washington is pushing a little too far.”

The S&P 500 sank 8.1 percent in the three weeks after Jan. 19 as Obama proposed legislation to limit risk-taking at banks and prevent a collapse of the financial system. Better-than- estimated profit reports then spurred a 15 percent rise through April 23. That extended the rally for the first 15 months of Obama’s presidency to 43 percent, as the government spent, lent or guaranteed as much as $12.8 trillion to pull the country out of its longest recession since the Great Depression.

Posted via email from Jim Nichols