Market Landscape Post Midterm Elections

The months of pools, punditry, and posturing are finally over.  After months of uncertainty and waiting, the midterm elections are done, and we now have resolution.

The Republican Party made major gains in the midterm elections.  They regained control of the U.S. Senate and the House of Representatives has not been so dominated by one party since 1946.  This is an interesting development, but does it mean that significant changes are on the horizon?  Does change in the Congress mean change for you?  Not really.  The business environment might be slightly friendlier after the midterms, but we do not expect significant changes.

The next key date in Washington, D.C. comes in mid-December 2014, when the continuing resolution to fund the government expires.  The subsequent key date will be mid-March 2015, when the U.S. Treasury will hit the debt ceiling once again.  At the margin, the Republicans’ control of Congress raises the risk they will demand concessions for passing a funding resolution for next year, or for raising the debt limit.  However, given the backlash following last year’s government shutdown, as well as initial comments from likely Senate Majority Leader Mitch McConnell (R-KY), we believe Congress is likely to avoid such a standoff.

Although we do not expect major changes from the new Congress, we are watching possible movement on several key legislative issues.  Republican control of the Senate and House could have positive implications for energy and financial services companies by easing the regulatory landscape.  For the energy sector, Republicans may be able to speed up permits for Oil and gas exploration and gain approval for the construction of the Keystone XL pipeline, providing a potential boost to energy and industrial sector growth.  Regulatory pressures on banks, including capital requirements, may be eased.  Tax reform is possible, although more likely to happen at the corporate level than an individual level.  And although Republicans will not be able to repeal the Affordable Care Act, changes to the law are likely, including the probable elimination of the medical device tax.

Clearly, elections have implications for policy and the direction of the country.  Ultimately, however, we believe stock market performance will depend more heavily on economic growth, corporate earnings, and valuations in the months ahead.  In the end, these factors will weight more heavily on the direction of stock prices than modest legislative changes.  And we continue to believe these factors may support further stock market gains.

Article contributor: John Canally, CFA

Photo by: The Library of Congress