Obama’s bull market intact as gridlock signals gains

By Bloomberg

NEW YORK: Growing dissatisfaction with US 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% on average starting in the second year of each US presidential term, measured from its lowest level through the high 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 will come after Mr 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 55% chance of Republicans taking control of the House, enabling them to block Obama’s policies. That may help prevent a bear market after equities tumbled as much as 17% in the past two months, says billionaire Kenneth Fisher. “I envision a rally from before the mid-term elections,” said Mr Fisher, who oversees $35 billion as CEO 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% to 1,064.88 last week, after revenue at Bank of America and General Electric trailed analysts’ estimates. The stock index climbed 0.6% to 1,071.25, paring its year-to-date loss to 3.9%.

The benchmark measure for US equities has advanced 15% 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 40-50 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%, according to a Bloomberg National Poll of 1,004 US adults. Odds that Democrats will lose their Senate majority are 18% 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 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.”

Losing seats may make it harder for 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 earning $2,50,000 or more. Mr Obama signed the largest change in US 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.

“The market has been uncomfortable with the pace of the legislative agenda this year,” said John Canally, an investment strategist and economist at LPL Financial. “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% in the three weeks after January 19 as Mr Obama proposed legislations to limit risk-taking at banks and prevent a collapse of the financial system. Better-than-estimated profit reports then spurred a 15% rise through April 23. That extended the rally for the first 15 months of Mr Obama’s presidency to 43%, as the government spent, lent or guaranteed as much as $12.8 trillion to pull the US out of its longest recession since the Great Depression. Spending cuts to trim record budget deficits may now curb further gains in stocks, according to Jason Pride, director, investment strategy, Glenmede.

Companies in the benchmark index for US equities are projected to increase profit 34% in 2010 and 17% in 2011, the fastest two-year gain since 1995.

“Midterm years have a historic tendency,” said Sean Clark, chief investment officer of Clark Capital. “The market doesn’t like when one party or the other has control of both the executive and legislative branches. Business leaders are very much paralysed waiting on a definitive set of rules.”