November 2, 2010
What if the Senate goes Republican? That’s the $64 trillion question – and one that could have major bullish implications for investors. The conventional wisdom, of course, is that the Republicans will take over the House but fall short of the nine-seat gain needed to win the Senate. But history suggests it just could happen.
The House has never changed parties without the Senate flipping too. This is a particularly perilous time for incumbents with unemployment stubbornly high and confidence in Democrats down sharply. Only 44 percent of Americans approve of President Obama’s performance, two points lower than Bill Clinton’s in 1994, when Democrats lost eight seats. The Gallup generic poll is indicating the Democrats could lose 80-plus seats. Even if they lose 60 to 65, the Senate could flip, according to political analyst Dan Clifton of Strategas, a Washington, D.C.-based research firm.
Recipe for a Rally
But even if the Senate stays in Democratic hands, there are still good reasons for the market to continue to rally into year end. A Republican House means that the GOP can block much of Obama’s agenda. Forget about cap and trade, for example. And don’t worry about expiration of the Bush tax cuts. If the Democrats lose the House, the President will likely agree to extend all the cuts, if only temporarily.
Probably even more important than the election, the Fed is expected to announce another round of large-scale bond purchases (QE-2) on Wednesday that would unleash another tidal wave of liquidity into the financial system. Most analysts consider that bullish for economic growth, and for risk assets like stocks, gold and commodities.
Then there is the historical tendency for stocks to rise after midterm elections. The S&P 500 has increased in the 12 months after every midterm election since 1942. The third year of presidential cycles also has been the strongest with an average 19.4 percent return. And stocks have done best when a Democrat was in the White House and Republicans controlled Congress.
So, you already have the makings of a bullish tri-fecta for stocks, gold and other risk assets with likely GOP gains, more Fed easing and improved odds for an extension of the Bush tax cuts. Add in a surprise victory in the Senate, and you just could see stocks rising even faster.
And the Winners …
What stocks would likely benefit from a Republican sweep of the Congress? Strategas’ research team suggests some likely winners:
Energy. A Republican Senate would likely put the nail in the coffin for cap and trade legislation, which would be a plus for coal companies. A GOP Congress would also be less likely to pass proposed energy tax increases, and more likely to pressure regulators to issue off-shore drilling permits.
Utilities. A GOP Congress could slow down the implementation of emission rules for stationary sources likely utilities.
Railroads. A Republican Congress will likely remove railroad regulation from the agenda.
Pharmaceuticals. The industry sees Republicans as more likely to protect their Medicare Part D program.
Managed Care. The GOP is likely to be friendlier to managed care companies, particularly those leveraged to the individual and small group markets.
Defense and Aerospace. This sector will see appropriations slowed, just less under a GOP than a Democratic Congress.
Interestingly, energy and utilities were among the best performers today.