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market outlook

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc. PHOTO BY FRED LUM/ GLOBE AND MAIL DIGITAL IMAGEFred Lum/The Globe and Mail

David Rosenberg has been predicting gloom for the stock market for about as long as anyone can remember.

But there could be a turn to the sunny side coming for the chief economist and strategist at Toronto money manager Gluskin Sheff. Mr. Rosenberg is getting a little less negative about the long term economic outlook, based on his belief that the U.S. elections in November could produce a pro-business Republican presidency, combined with Republican domination of both levels of Congress.

With one-party rule in the United States, Mr. Rosenberg expects Republicans to pull off a Jean Chrétien-style turn to fiscal prudence that will energize the business community and pull the country out of its long slump.

In an interview and in recent market comments to clients, Mr. Rosenberg says he isn't yet ready to leave the bear camp, or those who believe stocks will decline. He is urging investors to keep "some dry powder on hand" to take advantage of any panic selling resulting from such factors as the European mess or jitters over the U.S. debt ceiling issue.

But he's getting ready to consider switching to a bullish stance.

"Am I becoming more incrementally positive in the outlook for the U.S. as everybody seems to be tripping over themselves becoming more negative? The answer is yes. I am becoming incrementally more constructive over the long term outlook," he said.

What's getting Mr. Rosenberg ready to turn sides is the political shift in favour of business interests that he sees under way in the U.S. There was the little noticed recent decision by large majorities of voters in San Jose and San Diego to rein in public sector pension plans, as well as a recall vote that failed to unseat the anti-labour Republican governor of Wisconsin. Mitt Romney and Barack Obama are neck and neck in the polls, an unusually close race given the advantage incumbents normally enjoy.

"I think you're seeing some very significant albeit early shifts in the political wind," he said.

Mr. Rosenberg believes the fall vote is the most important U.S. election since 1980, and says it is likely to cause a shift "in favour of capital." He points out that the Reagan election set the stage for a move to the right in the U.S. and led to a big bull move in stocks, although he cautioned that the upturn didn't begin immediately after the election but got going in 1982.

Mr. Rosenberg believes politicians will take on aspects of the U.S. tax code that favour consumption at the expense of saving and investment. Some of the fixes he thinks will be under consideration are a national sales tax and an end to mortgage interest deductibility.

"The U.S. tax system is highly inefficient. There is more than a $1-trillion worth of … what is otherwise known as loopholes, and it really leads to a resource misallocation," he says.

In a recent client letter, Mr. Rosenberg said the timing of his transformation to a bull "could come as early as Thanksgiving," but in an interview he was unwilling to pick a more specific date. "The people that are going to find out about it first are our portfolio managers, before anyone else does, and our asset mix team."

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