One of the largest known unknowns facing investors this fall is the upcoming mid-term elections in early November.
It's been easy to forget just how much animosity and political polarization there is in Washington. We haven't had a major fiscal faceoff between Republicans in Congress and the Obama White House since late 2012. There was a spat last October — which shut the federal government down for the first time since 1996 — over ObamaCare. But we haven't seen a standoff over the big issues like the debt ceiling for a couple of years.
Instead, Republicans have laid low, allowing the Obama Administration to take the heat on a variety of issues from troubles in foreign policy to the IRS scandal. That could be set to change in just two months, given current predictions showing a Republican takeover of the Senate as a possible outcome — albeit by a fairly slim margin if it happens.
Another round of the type of political gamesmanship that slammed stocks back in August 2011 — for what's still the worst selloff of the bull market to date — could shatter the complacency currently enjoyed by investors (with the number of bears in the Investors Intelligence survey at the lowest level since 1987).
That's the scenario from well-known statistician Nate Silver of FiveThirtyEight, who just released the Senate forecast model above showing the GOP enjoying a 63.4 percent chance of winning a majority in the upper house. The races in Iowa, North Carolina, Colorado and Alaska are extremely close. But the odds of a Republican wave are real: Silver gives the GOP a near 25 percent chance of finishing with 54 or more Senate seats.
What will this mean for investors?
The team at Cornerstone Macro looked at the situation and believe the GOP, if victorious, would move quickly to secure a number of legislative victories on issues like approving the Keystone pipeline, repealing the medical device tax, fast-tracking liquefied natural gas export licenses and reforming the patent system.
The obvious beneficiaries from this will be companies in the energy and medical device industries, including companies highlighted by Cornerstone such as Patterson-UTI Energy (NASDAQ: PTEN), Continental Resources (NYSE: CLR), and Stryker (NYSE: SYK).
After that, things could get contentious quickly with the debt ceiling becoming an issue again in June. It's also possible that the lame duck session of Congress doesn't pass the required spending bills for the full fiscal year before it leaves in December — which would likely move up the timing of any fiscal showdown into the early part of 2015.
Depending on how the election plays out, and what Republicans leaders prioritize should they win, investors could start discounting another budget battle soon after the votes are counted in anticipation of trouble in the first half of 2015. It's worth noting that the timing of the first short-term interest rates hike from the Federal Reserve is expected to happen around this time as well.
Add it all up, and within a couple of months investors could suddenly face a more uncertain, and much more dangerous, political outlook. They are likely to react negatively.
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