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Question of the Week - November 10, 2014

Question of the Week - November 10, 2014

Guest Post - Wednesday, November 12, 2014

How did last week’s election impact the economy and market sentiment?

By the impact on Wednesday morning, equities were higher as were interest rates, but to a muted degree as the election results were largely in line with poll expectations—with the Republicans retaining their control of the House, as well as regaining control of the Senate for the first time in eight years.

However, both wins were by slightly wider margins than analysts had originally anticipated. There are still a few closer races being tallied, and re-tallied, and possibly re-voted in run-offs in a few instances, but naturally, the wider the margin of seats won, the larger the buffer for party line politics as well as for seats up for grabs in 2016.

Republican victories are seen as being market-friendly, since GOP policies are generally in line with business interests, and in theory for lessened regulation, lower taxes, higher defense spending, pro-petroleum, and ‘smaller government’ in general, which is a tailwind for legislation affecting corporate America and investment market interests. We say ‘in theory,’ as it’s rarely this cut-and-dried in practice, but hopes always start high after election day.

Another positive would be that a lack of gridlock also removes the risk of last-minute tensions surrounding government shutdowns, increases in the debt ceiling (another planned for early- to mid-2015) and the even more remote chance of a Treasury debt default—in fact, Senate Minority Leader Mitch McConnell reassured Americans during a post-election press conference that these concerns/hurdles are now off the table. We would hope that’s the case, as the scare a few years ago rattled markets unnecessarily. While it’s easy to make promises now, the chances certainly are lower now that the same party controls both chambers. On the negative side, it may take significantly more time for any of Obama’s upcoming nominees for federal offices and judgeships to be filled, if they can be filled at all—this has been a recurrent problem in recent years due to party strife. This includes two current vacancies on the Federal Reserve Board of Governors, which expire in a few years anyway, strangely enough.

There are a few industries that could be affected (some market impact may already be embedded since the election results weren’t a surprise), including energy infrastructure, which could benefit from fewer environmental roadblocks of the Keystone and other pipelines, as well as ‘tweaks’ to Obamacare, including possible removal of surcharge taxes on medical devices. There are others, of course, such as immigration reform, which have a less direct impact on financial markets. The broader tax reform issue is a daunting one, and progress on this remains to be determined, but a major roadblock (Democrats requiring a ‘revenue-neutral’ option, meaning retaining current levels of government tax receipts earmarked for spending) may have been partially removed. Likely, corporate tax reform might be an easier hurdle to tackle first, as opposed to the entire income tax regime all at once.

The dollar also gained on the week on its continued trend, which appeared by be helped by the election results. Why the boost? Better chances for agreement between the chambers lowers uncertainty in policy—whether one is happy with policy or not by a given party in charge, markets at least know what to expect and we how much markets dislike uncertainty. This again strengthens the U.S.’ role as the safe port in the storm, so to speak, relative to a struggling Europe and Japan which continue to be caught in the crosshairs of underlying fundamental challenges and need for additional stimulus. From a historical standpoint (and certainly no scientific prediction for the future), stock market results for the months and full year after mid-term elections have generally been positive.

Additional Reading

Read our Weekly Review for November 10, 2014.

Read the previous Question of the Week for November 3, 2014.

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