Republicans scored a big victory in Tuesday’s election by retaking control of the Senate. But was it also victory for investors?
Analysts say Wall Street is too complex to reduce to a simple yes or no based on the results of an election. History provides a similarly cloudy picture.
Republicans, as a party, are considered to be more Wall Street-friendly than their counterparts across the aisle. But a GOP victory had been expected for some time, meaning the election results are likely already priced into stocks.
John Canally, chief economics strategist at LPL Financial, predicted that U.S. markets will make a strong post-election finish in 2014. But his optimism isn’t exactly something new because he had expected continued gains in stocks well before Tuesday’s election results.
The stock market generally rises in the fourth quarter, and that is especially true following a mid-term election, according to Canally. He noted that the market rose in 88% of fourth-quarters in mid-term election years since 1950, regardless of which political party was in power.
Even before the voters cast their ballots this week, the market looked primed for a strong fourth quarter, Canally said. A number of high-profile companies reported strong results in recent weeks. The U.S. economy has also been strong with gross domestic product rising at an annual rate of 3.5% in the most recent quarter, fueling optimism about the rest of the year and beyond.
Still, Canally noted that investors had expected a Republican win and, as a result, some more business-friendly legislation like immigration reform and approval of the Keystone XL pipeline. Canally does not expect major corporate tax reform to hit anytime soon, though.
He expects the technology and industrial sectors to be the strongest going forward, but investors could also be “warming up” to energy stocks with the expectation that a Republican-led Congress would likely pass policies that benefit the energy industry. In fact, energy companies are already among those to get a lift from Tuesday’s election results, as their shares jumped Wednesday after a mostly bad year because of falling oil prices.
The healthcare sector should also remain strong heading into next year, Canally added. The fact that Republicans did not win enough seats to beat a filibuster means that they will likely be unable to repeal Obamacare, a thorn in the side of conservatives but a friend to the healthcare sector.
For the record, both the Dow Jones Industrial Average and the S&P 500 closed at record highs on Tuesday. Nasdaq dipped slightly, but remains near its highest levels of the past 14 years.
History suggests that the market will have continued success through April. The six month period starting in November tends to be the strongest period for stocks, particularly following a midterm election. Over the past 70 years, the S&P 500 has averaged a 15.3% gain during the six months that followed a mid-term election, according to S&P Capital IQ.
Another historical detail to consider is how the market performs with a Democrat in the White House and a Republican majority in Congress. The answer: That lineup has provided the S&P 500 with its best performances, according to Standard & Poor’s Equity Research.
Canally says that finding likely draws from a relatively small sample size with a number of variables (the last time this was the case, for instance, Bill Clinton was in office during a tech boom). But he does feel that having two parties in power in Washington, D.C. can also create an environment in which politicians are forced to work together, creating more bipartisan policy.
Looking ahead, a lot of the market’s success depends on at least some new market-friendly policies getting passed, which means bipartisan support will be needed. Senate Majority Leader frontrunner Mitch McConnell has expressed an eagerness to work with Democrats to pass new legislations, while President Obama said Wednesday that the White House was also amenable to working with the Republican-led Congress.
But, if McConnell and Speaker of the House John Boehner face any leadership challenges from the more conservative side of the Republican party, that could get in the way of bipartisan policy. “If it’s the current leadership of the GOP, I think that’s more market-friendly, because they’re more willing to work with the president,” Canally says.
On the other hand, if the two parties are unwilling to work together, the markets may dip. He gave the example of another standoff over raising the federal debt ceiling, which Canally says the “markets clearly do not want to see again.”
