The fact that the midterm elections are soon over may be enough to trigger a rally in equities, but investors may also be cheering the prospect of a stalemate in Washington as the best outcome for the market. Republicans appear poised to win back the House of Representatives in Tuesday’s election. The result in the Senate could also be a Republican majority, but that hinges on a number of very close races. Either way, there will likely be no consensus between Congress and the White House. “I think there will be things about traffic jams that the market likes. There will be things about traffic jams that the market doesn’t like,” said Ed Mills, Washington policy analyst at Raymond James. “Overall, the most important result is to put it in the rear view mirror so we know what we’re dealing with.” Democrats currently control the White House and both houses of Congress. In the Senate, both parties have 50 seats each, but Vice President Kamala Harris can cast a deciding vote. What the market would like in a Republican-controlled Congress is potentially less spending by the Biden administration on a new infrastructure plan and the taxes associated with it. But the market won’t like a battle over the debt ceiling that could emerge next year if Democrats don’t try to resolve it in the lame session later this year. “The biggest negative for the market is overall risk, and the biggest overall risk is the debt ceiling,” said Tom Block, Washington-based policy analyst at Fundstrat Global Advisors. “Raising the debt ceiling simply allows the Treasury to pay the bills that have been accumulated. We all know that at the end of the day we are going to pay our bills.” The debt ceiling caps the amount of money the government can borrow, and it’s been raised dozens of times, sometimes after a big fight. “If you’re a Republican, you’re scared of the debt ceiling…you know if you vote to raise the debt ceiling, it will be used against you,” Block said. As for market sectors, strategists say the traditional home energy sector could get a boost if Republicans control Congress. Additionally, health care companies could benefit from GOP opposition to price controls. Meanwhile, defense and cybersecurity could benefit from more spending under Republicans. On Monday, clean energy names took a hit as oil and gas stocks rose. The iShares Global Clean Energy ETF was down around 1% and the Invesco Solar ETF was down 1.3%. The Energy Select Sector SPDR fund, which tracks oil and gas names in the S&P energy sector, rose 1.7%. Historically, stocks rise after mid-terms. Mills of Raymond James said the market in general should be relieved that the election is over. From November 1 of a midterm election year to the following November, the S&P 500 has always been higher. But according to CFRA Research, in those November-November years when the presidential party lost a majority in one or both chambers, the gains were less. In general, history shows that the best returns on average have been when a Democratic president has faced a divided Congress. Returns in those years averaged 13.6%, but fell to 13% when the House and Senate were controlled by Republicans. CFRA data shows that when Democrats controlled Congress under a Democratic president, stocks averaged a 9.1% gain. Meanwhile, under a Republican president, the stock market gains an average of 4.9% when Democrats control Congress, and the market gains 7.3% with a divided Congress. Finally, when there was a Republican in the White House, and the party also controlled the House and Senate, the S&P 500 averaged a 12.9% gain. “The market might actually like a Republican-controlled Congress because anything the Republican House passes through the Senate is likely to be approved,” said Sam Stovall, chief investment strategist at CFRA. But strategists also note that Republicans might not go overboard on their agenda, as President Joe Biden will still have the veto. GOP victory in 2022 and beyond? Strategas Research says the stock market is signaling Republicans could sweep the election. The company has built portfolios that should do better or worse depending on which party has control. His Republican portfolio, which contains stocks from sectors like energy, as well as police and immigration enforcement firms, outperformed and signaled a 75% chance of a GOP sweep at the close. of Monday. But more importantly, Strategas says the size of the Republicans’ potential House victory could set the stage for the next election and keep the GOP in the driver’s seat until the next election. Dan Clifton, head of policy research at Strategas, estimates Republicans could win 27 seats, bringing the total to an all-time high of 240 seats. He said the Republican portfolio he had built rose on gains in energy infrastructure and biotech stocks. “The Republican gain in the House could be so big that it would take a Democratic sweep off the table in 2024, and the market can kind of see that,” he said. “Drug prices are not going to get worse and financial regulation is not going to get worse.” Piper Sandler’s strategists agree. “A big GOP party could do a Democratic sweep in 2024, which could kill Medicare for All/the public option or any legislation that puts a price on carbon for the foreseeable future,” writes Andy Laperriere, chief executive. of Piper Sandler’s American politics. to research. Some of Strategas Republican portfolio companies are Axon Enterprise, Johnson & Johnson, The Williams Cos, Huntington Ingalls Industries, ConocoPhillips and OSI Systems. Strategas also notes that waterlogging would lead to less spending, and therefore a less inflationary environment. So iShares 1-3 Year Treasury ETF (SHY) is in its Republican portfolio. Yields move opposite to prices, so bond yields should fall in a less inflationary environment. Closing the Senate races Political strategists say the Senate is too close to call, but it appears to be leaning toward Republicans. “Statistically it’s really close, but that doesn’t mean the results will be close,” Mills said. Mills said that while Democrats hold the Senate, the Republican-controlled House would be busy with its own agenda. “I think highest on the list is a continued ‘tough on’ approach on China,” he said. The two parties could find common ground on this subject, and the sector most affected would be technology. Mills said U.S. National Security Advisor Jake Sullivan discussed expanding protections for U.S. biotechnology and clean energy technologies. The Biden administration last month imposed export restrictions on semiconductors made in China by American companies. There are clearly stock market winners from a Republican victory, at least in the House. “I think overall people would consider it positive for energy,” Mills said. He said the odds would improve for easier permits for oil and gas production and a national energy program favored by Sen. Joe Manchin, a West Virginia Democrat who sided with Republicans on some Questions. This could benefit pipeline and energy service companies. Some companies may find the change of government more difficult. “Republicans attacking ‘woke business’ will likely be a major theme over the next few years,” Laperriere said. “If they have the majority, audiences targeting big tech, Wall Street (on ESG) and companies like Disney are likely. Much of that will be headline risk, although tech regulation could potentially gain a bipartisan support.” “If the Republicans win a majority in the House, Biden [Build Back Better] program, including any major tax hike is dead in the water,” he said. Laperrière, in a note, wrote that tech, small-cap, and financial companies are the most vulnerable to higher taxes and tighter regulations, and that they could benefit from a Republican Congress “If Republicans have both chambers, they are more likely to preserve expenditure (rather than depreciation) of R&D costs, expand total expenditure on equipment, and perhaps prevent tightening of the net expenditure cap d interests,” added Laperrière.
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