Federated big: Stocks will take off next year — regardless of who's in the White House

President Barack Obama will be re-elected in November, and Republicans will pick up 10 to 20 more seats in House of Representatives and will likely take control of the Senate, according to Federated Investors Inc. chief equity market strategist Phil Orlando. Hundreds of Raymond James advisers skipped lunch at their national conference Wednesday to listen to Mr. Orlando give his predictions on the elections, the economy and the markets. They were rewarded with a mix of good and bad news. The good news: Stocks are significantly undervalued and are due to take off next year, no matter who wins in November, he said. “Stocks are trading low right now because we are scared to death, and we are reflecting that concern by discounting stocks,” Mr. Orlando said. His investment recommendations are to overweight stocks, with a preference for domestic over international, underweight Treasuries and have zero allocation to cash. “Stocks are the only game in town,” he said. S&P 500 stocks generally are trading at around 12 times earnings; Mr. Orlando said that given the current fundamentals, they should be trading at closer to 17 times earnings. Of course, there are a lot of wild cards that are holding markets back, he said. Among them are eurozone problems, including the risk of Greek default and potential expulsion from the European Union. There is a growing fear of recession in China, India and Brazil, and a hard landing for emerging markets, as well as worries about what might happen in the Middle East. The upcoming elections and the so-called fiscal cliff the U.S. faces in coming years also are holding the markets back, he said. As for the November elections, Mr. Orlando gave Mr. Obama the edge, but the former said that he is keeping an eye on a few key indicators. If unemployment is above 7.4% on election day, that bodes ill for the incumbent, Mr. Orlando said. Currently, only about 37% of independents favor Mr. Obama. That number will need to move up for him to win. Pressing budget issues may be easier to face after the election, especially since several good plans for reducing the deficit already have been offered, he said. The Simpson-Bowles Deficit Reduction Commission, the Corker-McCaskill CAP Act, The Senate Bi-Partisan Gang of Six Plan, and the entitlement reform proposal from Rep. Paul Ryan, R.-Wis., could form the basis for a plan to reduce deficits. “The pieces for fixing this problem are on the table,” Mr. Orlando said.