Morgan Stanley strategist Adam Parker (who is pretty bearish these days) recently said that one thing that might cause a stock market rally is the expectation that Mitt Romney will win the election.
The idea of a Romney Rally is easy to comprehend. After all, Romney would be more likely to hold the line on tax increases, and more likely to get Republicans to solve the fiscal cliff crisis in short order.
An Obama victory means a gigantic battle over taxes, spending, and the debt ceiling coming at the end of the year, creating the kind of risks that the stock market hates.
But the idea of a Romney Rally happening between now and the election doesn’t make logical sense.
The problem is that a Romney victory isn’t going to feel inevitable unless the economy/stock market start to turn south between now and early November. As long as markets are going up, it’s hard to see a total collapse on sentiment towards Obama.
People love to talk about “narratives” and the candidates’ various problems, but look, the sense that Obama is going to win seems to be at a high-level right now (see: The Daily Beast on the possible Obama landslide), and not coincidentally, stocks have just made a several week high.
For more evidence that the stock market and the prospects of an Obama victory are intimately related, here’s a look at InTrade’s odds of an Obama victory. Note how closely it aligns with the chart above, as it bottomed in early June, and has been rallying since.
A believe in Romney’s inevitability isn’t going to emerge unless…. things collapse again, and if that happens, then the Romney Rally is undermined.
So baring some huge outside factor that changes the election, but which doesn’t affect the economy, the idea that you should buy stocks because of Romney probably winning doesn’t make much sense.
One final note: This isn’t saying anything about who will actually win. It’s certainly possible that Romney will win the election, even if the economy doesn’t turn down. It’s just hard to see how this would be seen as “inevitable” between now and the election. And of course, this is saying nothing about what the stock market will do after Romney wins (if he does).
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