Tuesday, October 26, 2010

Why Stocks are Up

Stocks yesterday hit their highest level in five months, close to the high that stocks reached last April, their peak since the 2008 financial crash. The Fox Index measures the gap between the current market and a healthy close for the three major indexes: 12,000 for the Dow, 1,300 for the S&P 500, and 2,500 for the NASDAQ, or a total of 15,800. The Fox Index, which reached -967 April 14, is now at -959 (see chart--the index reached its post-crash high of -927 April 15). But with unemployment remaining high and given a series of other poor economic statistics, why is the market up again?

In a word, the market’s rising in anticipation of a Republican victory in next week’s midterms. That's what CNBC’s Larry Kudlow has been saying, as have guests on CNBC anchor Maria Bartiromo’s “Closing Bell,” with Bartiromo nodding her agreement. On October 15, George Ball, Chairman of Sanders Morris Harris, said a GOP win is “priced into the market;” on October 21, Kelly King, CEO of BB&T said the election will improve the economy; and October 22, Morgan Stanley’s chief investment strategist David Darst said the market expects “a more friendly business environment” in the wake of the mid-terms that will trigger hiring, raise consumer confidence, increase housing prices, and improve retail sales.

With so much anticipation of Republican gains priced into the market, the election itself may do little to improve stocks. We shall see.

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