Tea Party may hold key to second-half market rally

Stocks likely to get boost if GOP takes over Congress, historical precedents indicate

Jul 25, 2010 @ 12:01 am

By Bloomberg News

Growing dissatisfaction among conservatives and independents with President Barack Obama before this year's midterm elections is good news for stock investors if history is any guide.

The S&P 500 has surged 48% 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% in other years.

An advance this year would come after Mr. Obama already presided over the biggest rally during the start of a presidency since Franklin D. Roosevelt in the 1930s. With Tea Party members throwing their considerable political weight behind fiscally conservative candidates, political-futures-market In-trade now shows a 57.8% chance that Republicans will take control of the House, allowing them to block the president's policies.

That may help prevent a bear market after equities tumbled as much as 17% in the past two months, said billionaire Ken Fisher.

“I envision a rally from before the midterm elections,” said Mr. Fisher, who oversees $35 billion as chief executive of Fisher Investments.

“Midterm years have a historic tendency,” said Sean Clark, chief investment officer of Clark Capital Management Group Inc., which oversees $2.1 billion. “The market doesn't like when one party or the other has control of both the executive and legislative branches.”

The S&P 500 has advanced 15% on average in years when there has been a Democratic president and Republican majority in Congress, the most of any combination, according to Strategas Research Partners LLC.

Republicans will gain 40 to 50 House seats in November, based on historical trends, including times when presidential support falls to Mr. Obama's current level, according to Strategas. The president has a job approval rating of 52%, according to a Bloomberg national poll of 1,004 U.S. adults.

There's a 17% chance that the Democrats will lose their Senate majority, according to Intrade. Republicans must win at least 40 seats in the House and 10 in the Senate during the Nov. 2 elections to take control.

EROSION OF POWER

“The current thinking is that the administration is punitive towards business and [that] any erosion of power in Congress would create an environment that's less punitive,” said Walter “Bucky” Hellwig, 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.”

The S&P 500 gained 6.7% 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% surge in 1995, the biggest in 37 years, data compiled by Bloomberg show.

Losing seats may make it harder for Mr. Obama to scale back Mr. 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 who earn $250,000 a year or more.

According to the Bloomberg poll, more Americans disapprove of Mr. Obama's handling of almost every major issue than approve, and a majority are pessimistic about the nation's direction, presenting an opportunity to Republicans in November.

Mr. 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.

Last Wednesday he signed into law an overhaul of financial-industry regulation that will create a consumer bureau at the Federal Reserve, a council of regulators to monitor firms for systemic risk to the economy and a mechanism for liquidating financial firms whose collapse would threaten the economy.

Most Senate Republicans voted against the measure, saying it doesn't go far enough to prevent future taxpayer-funded bailouts of Wall Street firms. White House spokes-man Robert Gibbs said that the Obama administration during the midterm elections will promote the biggest change in banking regulation since the Great Depression.

“The market has been uncomfortable with the pace of the legislative agenda this year. Republican control of the House could usher in some gridlock and slow the pace,” said John Canally, an investment strategist and economist at LPL Financial, which oversees $285 billion.

“I see a rally into year-end,” said Louis Navellier, who oversees $2.5 billion at Navellier & Associates Inc. “It's going to be a huge election.”

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