If you now think that a Republican sweep is a sure thing this election, and that it will be good for stocks, then newsflash, it’s probably priced into the market already.
The US midterm elections’ outcome may unsettle the market. The results from the upcoming midterm elections may already be discounted by equity markets as most polls and web sites suggest that the Republicans will take the House of Representatives on Tuesday. Moreover, investor fears could emerge that policy gridlock may transpire rather than desired political compromise as seen after the GOP took control of the House in 1994. With major issues to be tackled including the pending expiration of the Bush tax cuts, some DC horse-trading may be needed but could become difficult if ideological doggedness gets in the way.
In our view, the market could also suddenly realise that the Tea Party threatens to move the Republican party away from its pro-free market roots. Protectionism is a real threat. Thus there’s probably more room for Republicans to disappoint markets at this stage, right after the election on a short-term basis, given that markets have already rallied alongside expectations of a Republican sweep being good for stocks.
(Via Citi, Political Realities, Tobias Levkovich, 1 November 2010)