Investors eye opportunities as Republicans take the Senate
The Republican takeover of the U.S. Senate on Tuesday could lead to new legislative measures that directly affect the energy sector and other slices of the equities market.
Republican Senate candidates picked up formerly Democratic seats in Iowa, North Carolina, Montana, Colorado, West Virginia, South Dakota and Arkansas, more than the six gains needed 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.
The initial reaction on Wall Street was positive, with U.S. stock index futures pointing gains of about 0.4 percent on the day.
The rise in futures comes on relief that the results were clear, with the Senate majority party not in doubt. Investors had been concerned that some close races would be forced into run-offs, an outcome that could have delayed knowing who would control Congress’s upper chamber for weeks.
Investors with a stake in the energy sector, the sole industry group in the S&P 500 with negative year-to-date returns, hope Republican control of the Senate 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 an oil export 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 volatility in that sector.
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.”
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.
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.
(Additional reporting by Ryan Vlastelica; Editing by Steve Orlofsky and Toby Chopra)