Market pros: Why stocks may suffer if Romney isn't GOP pick

ByABC News
January 29, 2012, 4:11 PM

— -- So far, the presidential election has not affected stocks, but that could change if Mitt Romney appears unlikely to make it as the GOP nominee.

For the past several days, Romney's vulnerability to former House Speaker Newt Gingrich has been the talk of trading rooms.

Gingrich beat Romney handily in the South Carolina primary last Saturday, the second of three early contests that Romney lost. But the volatile Gingrich is not viewed as a strong candidate to beat President Obama.

"Obama's gone from 50% probability to 55% on Intrade," said Dan Clifton, Strategas head of policy research. "This week he just kind of exploded once Gingrich won in South Carolina. The Intrade market is saying there's a much greater chance of President Obama being re-elected."

Anxiety has been building on Wall Street about who will challenge President Obama, who gave a confrontational State of the Union Address Tuesday night.

Romney, the former governor of Massachusetts, is by far the preferred candidate on Wall Street, where many disagree with Obama's policies and have been stung by what they call "class warfare." Romney's supporters believe he supports more business-friendly policies that will create jobs and support the stock market.

"I don't think it's fully reflected in the market yet," said Art Cashin, UBS director of floor operations. "There's a mild degree of anxiety, and that's really because it's overbought. Is there a gentle longing for a smoke-filled room? Yeah. There's some yearning for that."

The S&P 500 is up more than 4% since the start of the year.

Analysts believe if Romney loses the Florida primary on Tuesday, he will have a hard time stopping Gingrich's momentum.

Romney had support of 36% of the primary voters in the Florida poll, versus Gingrich's 34%. Gingrich, however, led Romney by 6 points among voters polled after the South Carolina vote, while Romney had an 11 point lead before the weekend vote.

"The two risks are the Romney candidacy just starts to flounder, and he's not the candidate, and the other is if you get this kind of malaise in the Republican party long enough, it would invite in a third party candidate, a Ross Perot-type that would splinter the whole thing," said Jack Ablin, CIO at Harris Private Bank. "Those are the two risks and I think the market is worried about those risks."

"I would put those risks in the second half, but the longer this is really floundering, the more intense this could be," said Ablin.

Barry Knapp, head of equities portfolio strategy at Barclays, said Florida could be an important key for both the race and the market, which Barclays' analysis shows has been volatile during primary season.

"If Romney closes the gap then this race goes on until the end of March, if not longer," said Knapp. "I think if Romney loses decisively, and it looks like it's going to Gingrich, then my sense is that it would be a volatility increasing event."

"My general sense is that most people would view Gingrich as a much higher beta candidate. While things might go very well for the Republicans, they could also go very wrong," he said. Knapp said his analysis shows that after primaries, the market's focus on elections usually enters a lull until the party conventions in late August.