Barclays: Election More Important Than Europe to U.S. Stocks

[Stocks-to-Watch]

Investors in the U.S. have been keeping a close eye on Europe for more than six months now, and trading has largely been dictated by the machinations of policymakers overseas. But with a new year comes a new focus, argue Barclays analysts in a report today.

“We believe in 2012 the U.S. elections will be far more significant to domestic investors than Europe. Failure of the JSC now leaves open policy questions waiting for November; the markets should begin discounting the election following conventions in August. On balance, the economy should continue to improve as policy headwinds abate and consumption increases. The deceleration in earnings growth along with uncertainty surrounding public sector deleveraging (in the U.S. and Europe) and high levels of inflation volatility leave us with a flat multiple of 12.9x and 2012 price target of 1330.”

One person who may getting in the way of an even bigger rally: Newt Gingrich.

“An early conclusion to the GOP selection process would likely be a net a positive for equities, in our view. Our earlier work shows the primary process is generally associated with heightened equity market volatility and, given the role macro and policy concerns played in driving high correlation, any volatility-reducing event is a plus in the current market environment.”

Barclays also notes that correlation (the tendency of stocks to trade together based on non-company-specific news) has decreased this year, which may be boosting stocks. But if the high level of correlation that has persisted for the last couple of years returns, it could slow or kill the rally.



Original Article Source by Barrons.com