How to Play the Stock Market After the GOP Win

How to Play the Stock Market After the GOP Win

They did it. And they did it in a big way.

I'm talking, of course, about the sweeping victory by Republicans in Tuesday's midterm elections. They took the Senate, with what will likely end up being a 54-seat majority. They tightened their grip on the House of Representatives with the largest majority since the 1940s. And they captured many more governors' races than thought possible.

While the stock market seems to be viewing this positively, with the Dow Jones Industrial Average pushing to new record highs, much still depends on the reaction from President Obama and Congressional Republicans. Will there be acrimony? Or will there be conciliation?

Historically, stocks tend to do well in the months surrounding the second midterm of a two-term president. Moreover, the holiday season is the best three-month stretch for the market during the year. But this is no ordinary market. And this has been no ordinary election.

Infographic: The Most Expensive Midterms Ever

Despite some comments on both sides about compromise, there are already signs we'll likely see more acrimony as the two sides dig in on issues like immigration reform (Obama looks likely to use executive action to get what he wants), which could bait Republican hardliners into unpopular strategies like pursuing impeachment charges. Moreover, Republicans are likely to see Obama veto changes to the Affordable Care Act as well as other measures such as the "Audit the Fed" legislation they've been pushing.

Fireworks could happen as soon as next month when the current continuing budget resolution expires. Another confrontation could happen in March when the debt ceiling is back in play. A short-term budget deal now could once again join the two issues together early next year. The atmospherics should become clearer after the meeting of Congressional leaders at the White House on Friday. The more smiling faces, the more likely it is that the stock market's renewed push to record highs will be sustained.

Setting all that aside, and thinking optimistically, the folks at Cornerstone Macro created a basket of stocks that should benefit from the Republican's rise to power.

Energy was the largest sector group on thinking that the GOP will push forward with efforts to expand American energy exports and approve the Keystone pipeline as well as loosen industry regulations. Stocks listed as beneficiaries include Continental Resources (CLR) and Patterson-UTI Energy (PTEN).

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Next is medical device companies such as Boston Scientific (BSX) and Stryker (SYK) that are set to benefit from GOP efforts to roll back the medical device tax portion of the Affordable Care Act. Defense contractors such as General Dynamics (GD) and Lockheed Martin (LMT) are also on the list because of expectations of an expansion of the war effort against ISIS and Syria.

Areas likely to be negatively impacted by Republicans include hospitals, such as HCA Holdings (HCA), and homebuilders, like DR Horton (DHI). The latter would be impacted by efforts to reduce the government's role in the mortgage market as well as limit the Federal Reserve's cheap money stimulus efforts.

For my own clients, I recommended moving to cash on Tuesday and sitting on the sidelines as we wait for the post-election dust to settle. Stocks are already extended on a short-term basis after the roaring rise out of the mid-October lows. Any appearance of a continuation of partisan bickering could result in a retest of these lows on fears the fiscal fights that followed the GOP's capture of the House in 2010 are about to get bigger.

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