Investors eye U.S. election outcome as results trickle in

By Reuters

Nov 04, 2014 11:57 PM EST

With Congressional election results so far confirming expectations, a Republican takeover of the U.S. Senate will likely deal investors a result that could have a direct effect on the energy sector and other slices of the equities market.

Republican Senate candidates picked up formerly Democratic seats in Montana, Colorado, West Virginia, South Dakota and Arkansas, giving them five out of the six net gains they need for a majority in that chamber.

With Republican control of both houses of Congress and a Democrat in the White House, political analysts expect more of the gridlock that has characterized most of the six years of President Barack Obama's tenure.

"There aren't too many surprises here, and I don't think markets will react negatively, or positively on this," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

Investors with a stake in the energy sector, the sole industry group in the S&P 500 with negative year-to-date returns, hope a Republican Senate takeover will speed up approval of oil and gas pipelines, reform crude and natural gas export laws, and motivate the Obama administration to include those energy exports in new, or broader, trade agreements.

Many voters are giddy about gasoline prices under $3 a gallon, but still no party wants to be in charge of lifting a ban that could result in gasoline prices rising again. So politicians have room to maneuver around the issue, opening the possibility for a spike in market volatility.

It is also possible that an emboldened Republican Party will attempt to force budget cuts and consider another battle over the debt ceiling in 2015, which could sap market confidence. Equity markets have been damaged in the recent past by such battles - most notably in 2011, when a budget fight led to the first-ever downgrade of the U.S. credit rating.

"Republicans who want to make a run for control of the Executive branch in 2016 will likely strike a tone of compromise," said Jacobsen, but "those on the fringe will likely look to turn the showdown into a shutdown."

S&P E-mini futures were up 5.75 points, or 0.3 percent, late on Tuesday.

Other issues that may also find traction under Republicans include a potential repeal of the medical-device tax that is part of the Affordable Care Act, which could be a positive for the healthcare technology sector. Republicans could also try to slow adoption of online gaming, which could boost casino stocks.

Tuesday's elections were deciding 36 senators, 36 state governors and all 435 members of the House of Representatives.

Regardless of the outcome, history shows a bullish bias in stocks after midterm elections. Since 1928, the S&P 500 has posted a median return of 7 percent in the 90 days after a midterm, with returns positive 86 percent of the time, according to Barclays.

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