Today’s Headlines: Republicans Take Control of the Senate

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Today’s Headlines: Republicans Take Control of the Senate
November 11, 2014
A Midterm Election Rout

Rout, shellacking, thrashing… pick your descriptor to define the Republican Party’s victory over the Democrats in the midterm election.

Republicans gained seven seats in the Senate to take control of the chamber, and, as of this writing, are likely to pick up two more seats in Alaska and Louisiana. Combined with the pickup of 12 seats in the House of Representatives, the gains make Congress as Republican as it has been since 1947 – and maybe since 1929 if a few remaining contested House races break Republican. Moreover, the GOP beat back gubernatorial challenges in Wisconsin, Michigan and Florida while picking up three new governorships.

While Democrats are quick to point out that the electoral map smiled on Republican senatorial candidates this year (weighted heavily toward the south and west), and that the party not in possession of the White House tends to do well in off-year elections, 2014 was a Republican tsunami pure and simple.

How are these results likely to affect the economy? Does this mean even more intense gridlock for the remaining two years of President Obama’s term, or could this lead to progress?

Short-Term Success

History suggests that the economy will do well, at least for the next few months. Stocks seem to flourish in the relative calm after midterm elections. BTIG pointed out that, after the last 13 midterm elections, the following six-month period produced an average 16.5% rise in the S&P 500 (compared to 3.7% in non-midterm years).

The combination of a Democratic president and a Republican-controlled House and Senate is also the preferred configuration for the growth of stocks, according to S&P Capital IQ.

So far, the Dow has obliged, rising from 17,380.56 at the close of business on Election Day to the new high of 17,573.93 on Friday. Similarly, the S&P 500 rose from 2012.25 to 2031.34.

However, this effect will fade quickly once the Congress and the President get down to work… or lack thereof. We will see which is the case.

Cooperation or Conflict?

Pundits are split on what will happen. Some are predicting the Republicans to implode within themselves, clearing the way for Democrats in 2016. Others are predicting a deluge of legislation, breaking the dam forged by Harry Reid in the Senate and forcing the President to dust the cobwebs off his veto pen.

We suspect the boring yet useful middle ground is more likely to happen. Both sides in Congress realize they need accomplishments that they can run on in 2016 to carry a presidential election-year majority, and House Speaker John Boehner now has a wide enough margin that he should be able to prevent the sort of Tea Party tantrum that resulted in the poorly received government shutdown.

One area of potential compromise is the repeal of the medical device tax component of the Affordable Care Act, as it seems like a useful compromise point for Democrats on the ACA. Medical device stocks should logically benefit.

The Trade Promotion Authority (TPA), which requires up or down votes on trade pacts without amendments, has support with both the President and the Republican leadership. The Trans-Pacific Partnership (TPP) may be tougher to pass, but it has a legitimate shot at succeeding.

In general, market-opening trade issues are more likely to pass – assuming they pass relatively quickly before politicians start looking to 2016 and calcifying their positions.

The Keystone Pipeline stands a better chance of coming to fruition. It seems likely that the Congress will force President Obama’s hand with a vote on the pipeline, and such a vote may be approaching a filibuster-proof margin in the Senate. There is scattered (and largely quiet) Democratic support.

Tax reform is harder to predict, but it is likely that on the corporate side, some action will be taken intended to lower the overall rate and close various loopholes in a revenue-neutral fashion simultaneously. All parties involved are interested in limiting future tax inversions and keeping business profits in the U.S.

Should tax reform pass, with this configuration of Congress, it is likely to be business-friendly and therefore it should be either positive or neutral for the economy.

The Takeaway

Our opinion is that there will be limited positive progress on issues such as tax reform, trade, and minor revisions to ObamaCare. These will be relatively bipartisan and unlikely to produce large differences in the economy.

Compared to the upcoming actions of the Federal Reserve and the overall interactions of the world economy, Congressional actions will probably be no more than periodic noise that adds to stock volatility but does not change the overall trend.

We are likely to damn the 114th Congress with faint praise, saying that they accomplished more than the previous one… and that’s not saying much.

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