FBR Capital Markets believes that for President Barack Obama to win re-election, improving economic conditions will be key, which it would view as a tailwind for the markets.

The President was able to win the passage of a two-month extension of the payroll tax holiday and unemployment benefits. We believe that it is likely that a yearlong extension will occur, said Edward Mills, an analyst at FBR Capital Markets.

At a minimum, the extension will continue the current level of stimulus and prevent any negative economic impact stemming from allowing the provisions to expire, said Mills.

Mills said the latest public polling shows a tie, between Mitt Romney, Ron Paul and Rick Santorum, with regard to the winner of the Iowa Caucus. A win in the Iowa Caucus for Mitt Romney would have many political pundits calling the contest for the Republican nomination over.

The analyst said a strong showing, with either Ron Paul or Rick Santorum winning, would not change the calculus all that much. Ron Paul has a strong base of support but has a very low ceiling and is seen as significantly unlikely to win the nomination.

A win by Rick Santorum could help prolong the battle for Mitt Romney as he tries to take the mantle of the true conservative in the race. However, Mills believes that Santorum lacks the fundraising and logistical support to capitalize on an Iowa win and is likely to suffer the same fate as the other candidates who quickly rose to the top of public polling among Republican voters.

After the Iowa Caucus, New Hampshire holds the first of the nation's primaries, next week, followed by South Carolina, Nevada and Florida by the end of the month. By March 6, 21 states will have held either a primary or a caucus to register their preferences for the Republican nominee for President, making it likely a nominee is decided by March, said Mills.

Mills said the ability of Democrats to maintain their majority in the U.S. Senate took a hit over the holidays with the retirement of Senator Ben Nelson (D-NE). Nebraska is a Republican state and Ben Nelson was widely seen as the only Democrat who had a chance to keep the Senate seat in the Democrats' column.

The analyst said this Nebraska seat joins the open seat in North Dakota as likely switches from Democrat to Republican. Republicans need to net four seats in the 2012 elections in order to have a majority.

The brokerage said the Democrats were defending 23 seats to the Republicans' 10. This announcement likely allows Republicans to spend more on picking up a seat in other swing states rather than on attempting to defeat Senator Nelson.

We believe it is likely that the Republicans maintain a majority in the House. Should Republicans also have a majority in the Senate, their ability to advance legislation will be significantly enhanced, said Mills.

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