What a Republican Victory Means for Stocks

The Republicans seized control of the Senate–and in the end, it wasn’t even close.

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As of this writing, Republicans had taken at least seven seats from the Democrats, including those in North Carolina and Colorado, and the stock market appears happy with the news.

The S&P 500 has gained 0.3% to 2,108.88 at 10:24 a.m. today, while the Dow Jones Industrial Average rose 0.3% to 17,430.56. The Nasdaq Composite has ticked up 0.1% to 4,628.73 and the small-company Russell 2000 has jumped 0.4% to 1,170.06.

Capital Economics economist Paul Dales doesn’t think the mid-term elections will have big impact the economy in the U.S.:

Although the midterm elections have tipped the balance of political power towards the Republicans and could kick start progress on some trade and energy policies, they don't alter the economic landscape much. Even a Republican party which is in control of both chambers of Congress is unlikely to refuse to raise the debt ceiling next year and trigger another Federal government shutdown.

Wolfe Research’s Chris Senyek thinks tax reform is “back on the agenda” following the Republican victory, even if it’s not a sure thing. He considers the impact. He explains why:

Overall, we estimate a corporate tax cut to a 25% rate could boost S&P 500 companies' earnings by ~$7-8 per share in the aggregate (we believe 'bottom up' 2014 consensus SPX earnings of $131/share incorporates a 28% tax rate)…the impact of corporate tax reform would not be shared equally across sectors and industries, and the impacts are multidimensional. On the one hand, a corporate tax cut would boost reported earnings for most companies except ones reporting low tax rates. On the other hand, the elimination of tax preference items such as accelerated depreciation would increase the cash taxes paid by companies reducing cash flow.

Companies that could be hurt by tax reform due to their already low tax rates include Broadcom (BRCM) and Celgene (CELG), while Best Buy (BBY),  Madison Square Garden (MSG) and Gap (GPS) could benefit, Senyek says.

Evercore ISI’s Dennis DeBusschere thinks the Republican victory is helping stocks today but thinks the market needs some positive economic data:

It was a decisive victory for the republicans last night and outside of commodity prices, which march relentlessly lower, risk assets are higher and the USD is stronger. Gold is being hit hard again on the election news as well. There is some hope, as is reflected in the stronger USD, that split control (Democratic White House and Republican Congress) will break some of the partisan gridlock that has kept congress from addressing a number of pressing issues. As Terry Haines, Evercore ISI’s political expert noted, “For their own reasons, congressional Republicans, congressional Democrats, and President Obama will work to achieve legislative success on many important issues in the next Congress in 2015 – 2016… we look for successful debt ceiling legislation and an extension of the budget deal beyond 2015. We also look for legislative success on corporate tax reform; energy policy reform; and European and Pacific trade deals.” The sample set of market reactions to mid-term elections is very small and the subset of times when control of congress has switched is even smaller, so we can’t objectively handicap the impact the election will have on stock prices. Our expectation is that trends in the outlook for global growth will continue to drive equity returns, but it does seem to favor the USD, which is a tailwind for U.S. focused risk…We will be keeping an eye on U.S. business confidence going forward to determine the lasting impact of the election.