Markets Pricing in Split Congress, Gains Under GOP

Tuesday, 12 Oct 2010 01:14 PM

 

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This November, the bulls are looking for elephants.

The Republican Party, with an elephant as its symbol, could take control of at least the House of Representatives in the November 2 mid-term elections, increasing the prospect of legislative gridlock and pushing stock prices higher.

"We're going to have gridlock relative to what we have now, and for markets, it's best to have paper-thin margins between the parties," said Ken Fisher, chief executive of Woodside, California-based Fisher Investments, which manages about $33 billion.

According to a Reuters poll, a majority of analysts expect a Republican takeover of at least one chamber will result in near-term equity gains.

"The S&P 500 has already put in about 20 to 30 points as a result of the polls shifting in favor of the Republicans, and if they don't get those gains those points will be taken out," said Jeffrey Friedman, senior market strategist at Lind-Waldock in Chicago. The S&P now trades around 1,167.

"I see upside of maybe 5 to 6 percent if the Republicans take both houses, depending where we are on November 1, but if Democrats win, we could see downside of 50 points."

In midterm election years dating to 1962, the S&P 500 has on average risen 2.35 percent in the two months prior to the election but gained 7.46 percent in the three months following, according to investment firm Birinyi Associates of Westport, Connecticut.

TAXES AND ENERGY

The primary area of concern to investors is taxes; it is unclear whether tax cuts, and certain tax reductions on dividends, enacted during the Bush years will remain intact.

"If we revert back to the old tax rules, the market will have a substantial selloff. We'll run the risk of a second recession," said Keith Wirtz, who helps oversee $24 billion as the chief investment officer at Fifth Third Bancorp in Cincinnati, Ohio.

The energy sector, which generally opposes plans like cap-and-trade legislation and drilling moratoriums, could be among the beneficiaries of a Republican-led Congress.

"The oil industry would probably do better with Republican gains because regulatory pressures are coming from the Democratic side," said Carl Birkelbach, chairman of Birkelbach Investment Securities in Chicago.

Birkelbach said alternative energy companies could suffer if Republicans win as they may de-emphasize government subsidies for the industry. Since the start of September, the S&P Energy index is up 14 percent, compared with gains of 11 percent for the broader index.

Linda Duessel, market strategist at Federated Investors in Pittsburgh, said: "Republicans won't be able to repeal healthcare because no one will have 60 votes, but it does seem likely that cap-and-trade would be considered dead if they won."

REPEAL, NO. REFORM, POSSIBLY.

Under Democratic control, the Obama Administration passed sweeping healthcare and financial regulatory overhaul. Those sectors both came under pressure in the run-up to bill passage, but the prospect of major change in the laws is unlikely.

"If Republicans capture the House as expected, people would expect a moderation of some of the regulatory provisions in healthcare and financial reform," said David Joy, chief market strategist at Boston-based Columbia Management, which has $341 billion in assets under management.

"If they (Republicans) don't have a good showing, you could see an adverse reaction in those two sectors."

The S&P financial sector fell 17 percent from a high in mid-April to when the bill was signed in July. It has trailed the broader market since September 1, rising 8.1 percent to the S&P's 11 percent gain.

Given broad Republican opposition to stricter regulation of industry, strong electoral gains by the party could help the financial shares.

"They've been under the most pressure with the Obama administration, and in a more business-friendly Congress, they'd be the biggest winners," said Jaewoo Nakajima, associate managing director at ISI Group in New York. "Republicans may attempt to repeal parts of financial regulation or at least go easy with some of the reforms in the pipeline."

But because the Senate requires 60 votes to override a filibuster and a two-thirds majority of the 100-seat body to overturn a presidential veto, few argue that even sweeping Republican victories will result in massive changes to current law.

© 2014 Thomson/Reuters. All rights reserved.

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