Stocks 'Gallup' After Poll Predicts GOP Landslide

Thursday, 07 Oct 2010 10:39 AM

By Larry Kudlow

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Could it have been the new Gallup poll that drove stocks up almost 200 points on Tuesday?

That blockbuster survey, regarded by many as the blue-chip gold standard for election forecasting, pointed to an unprecedented Republican landslide tsunami in the generic congressional race. That blowout could include a GOP House gain of 65 to 70 seats, and a bare-majority 10-seat pickup in the Senate.

Released Monday night, the Gallup numbers demolished the new narrative of the elite mainstream media in Washington, and their prediction that somehow the Democrats are mounting a serious comeback based on frantic Obama campaigning and a slew of multimillion-dollar negative campaign ads.

Now, I acknowledge that most market mavens attributed the rally to the better-than-expected September ISM nonmanufacturing report, which printed 10 A.M. Tuesday. And yes, this did matter for the market. The composite index came in at 53, a bit better than expected. It beat August by two points, although it was still lower than July and below the second-quarter average of 55.

Soft, but growing. No double-dip recession.

Meanwhile, the business-activity index for September services arrived in sloppier condition. It came in below the August number and well below the second-quarter level. So, no recession in the widespread services economy, but no boom either. Just a modest expansion in the services sector with no new zip.

What was supposed to be Recovery Summer, according to Joe Biden, never came to pass.

Other market commentators attributed the Tuesday rally to Ben Bernanke’s speech, delivered Monday night in Providence. The Fed head clearly moved the central bank a big step closer to QEII money-creating through new bond purchases that will inject fresh cash into the economy. However, soaring gold prices and a plunging dollar on the foreign exchanges have been discounting this since Bernanke first launched QEII in Jackson Hole, Wyoming, in late August.

So there’s nothing really new on the Helicopter Ben front. Nor can we say with any certainty that more money-printing and dollar-sinking are plusses for stocks and the economy. Longer run, I don’t think they are.

Then there are the stock pundits who pointed to the new QEI in Tokyo, also announced Monday night. This would increase the Bank of Japan’s balance sheet by roughly $60 billion, while dropping Japan’s target rate to virtually zero (just like ours). One aim of this action is to lower the exchange value of the yen (a goal of almost all currencies these days).

But most of this has been discussed already. And $60 billion in new Japanese quantitative easing is pretty small potatoes compared to the U.S. Fed’s $1.5 trillion humdinger from early 2009 to early 2010. Japan’s money announcement may have moved world markets, but I venture it wasn’t much of a game-changer on the NYSE. Maybe some, but not much.

What I do think, however, is that highly profitable companies would love to get Washington out of their hair. Anything that even slows down the federal tax-and-regulatory pawing of American firms could conceivably prompt businesses to unleash their massive cash hoard into something that more closely resembles a normal capital-goods-investment and job-hiring campaign — one that would increase economic growth and reduce unemployment.

Hence the significance of the new Gallup poll, which has political regime change written all over it.

Surveying likely voters, Gallup’s “high turnout model” shows Republicans in the lead by 53 to 40 percent. Good enough. But the more likely midterm “low turnout model,” with 40 percent of voters in attendance, shows an incredible GOP lead of 56 to 38 percent. Famed political analyst Michael Barone suggests that it won’t be 1994, but 1894 — when Republicans picked up 100 new seats in a House of roughly 350 members.

Now that’s a game-changer for politics and stocks. And that’s what I think caused the 200 point rally on Tuesday.

Such a staggering Republican victory would embody tea-party, free-market values of limited government and lower spending, taxing, and regulating As John Boehner puts it, “We can stop all the bad stuff.”

And stopping all the bad stuff would certainly enhance the future value of all those record-breaking corporate cash flows, which then can be capitalized into higher stock prices. In other words, a huge stock market rally. A veritable October surprise that could continue to year end.

We saw the beginning of this rally with the tea-party victories this summer. Now the Gallup poll sees the free-market tea-party carrying the GOP toward a chart-breaking victory on November 2.

No, the election is not yet over. We must wait two fortnights for the results. But a Gallup poll on Monday night may very well have ignited stocks on Tuesday. That’s a harbinger of very good things to come.

To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

© Creators Syndicate Inc.

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