Stock Market News: Elections Impact On The Market

| November 2, 2010 | 0 Comments

This morning I stopped by the polls to cast my vote in today’s big midterm elections.  Voting always gets me thinking… Should I be happy I’m doing my civic duty?  Hey, in some countries, voting isn’t even a guaranteed right.

On the other hand, I’m not exactly thrilled with Congress right now.  And of course, every time I vote I can’t help but wonder if it even makes a difference.  Just because my chosen candidate makes it into office doesn’t mean anything useful will be accomplished.

Still, at the end of the day, I usually feel my vote was worthwhile.  I’m living in the world’s largest democracy after all.  Voting is one of the few political activities we can control.  So why not use it…

Buy here’s the thing… something’s a little different today.  Instead of thinking about the meaning of my vote, I’m wondering how the elections are going to impact the markets.

I guess it may seem like an obvious topic to dwell on.  There’s been constant media attention about this very subject.

Here’s what we know…

Everyone expects the Republicans to gain control of the House.  The Senate will likely retain its Democrat majority.  But it would be pretty shocking if the Democrats don’t lose a bunch of seats overall.

So why all the political carnage to the Democratic Party?  Because historically, awful economic conditions tend to wreak havoc on the party in office at the time.

Anyway, by the end of today, we’ll likely see some major Congressional changes for 2011.

But can we really expect Washington to change?  And how will the markets respond?

Let’s get right to it… I think the market has already built in sweeping Republican victories.  Don’t expect a huge rally in the equity markets after Tuesday.  We’ve already seen it.

In my opinion, the real questions are how policies change with a new Congress.  And what impact will those policy changes have on the markets?

There are several scenarios which could occur.  And how they play out over the next few months will determine their impact on the financial markets.

Take taxes for example.

The Bush era tax cuts are in the news a lot lately.  The voting outcome today could go a long way towards determining the fate of the tax cuts.

Republicans obviously want the tax cuts to stay.  Democrats generally want certain parts of the tax cuts to expire, such as the cuts dealing with high income earners, dividends, and capital gains.

It’s clearly a big deal and the decision impacts just about everyone in the country.

Here’s the most likely scenario… with Republicans winning the House and several Democratic Senators already saying they’ll support a tax cut extension – we shouldn’t expect any major tax changes for now.

And that’s definitely a positive for the markets.  When and if the tax cut extensions are set in stone, we could see another rally in equities.

But what about some of the other major topics like healthcare, energy, and financial reform?

Here’s my take…

Republicans want to repeal parts of the recent health care legislation. Democrats obviously want to leave it alone.  I don’t see a large enough majority on either side to make any impactful changes.  Result… a stalemate in healthcare for now.

How about energy?

This topic is tossed about in political circles all the time.  Carbon caps, global warming, reliance on oil, fracking and the environment, and the Nat Gas Act.  Frankly, there’s a ton going on.

If the Republicans win the House, it’s good news for Big Oil.  Don’t expect carbon caps anytime in the foreseeable future.  We might see the Nat Gas Act move forward… but it won’t be fast tracked.

Basically, it’s all good news for oil and gas companies.

Finally, there’s financial reform.  Polls show the public generally supports the Financial Regulation legislation which was recently passed.  And without a clear majority in government, we likely won’t see any further changes.  That means status quo for banks and other financial institutions, which could rally off the news.

Here’s the bottom line…

For the most part, we’re going to see to gridlock in Congress.  And that’s a good thing for the financial markets.

The Republican election victories are already built in to the equity markets.  But the extension of the Bush tax cuts and lack of any decisive action in healthcare, energy, and financial reform should keep the markets from worrying about Congress or the White House messing with the markets.

You know what that means…

The direction of the markets is once again going to come down to the economy and the Fed.

The voting may be over, but the action may just be getting started… starting tomorrow with the biggest Fed meeting of the year.  Fasten your seatbelts!

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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