We asked traders how control of the Senate will affect markets. Here's what they said...

November 4, 2014 09:53 AM

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Today, Americans will go to the polls in what could be an historic mid-term election.

At stake is control of the U.S. Senate and the direction of the country in the final two years of the Obama Administration. We asked our experts about the likely outcome of the election and what will be the impact on markets if control of the Senate switches hands. 

What seems clear is that gridlock, while annoying to some, is just fine with the markets. The big question is what is the market expecting? If the current gridlock is bullish then would Republicans gaining control of the Senate upset the apple cart? If a GOP victory is priced into the current all-time highs, would the Democrats maintaining control cause a massive sell-off? Or with Congress hopelessly gridlocked and the current campaign being waged by big-donor super-pacs have ordinary voters tuned out?
 

This week we asked:

What impact will the upcoming election have on financial markets if:

Republicans take over the Senate?

Democrats retain the Senate?

Democrats make serious gains in the House?
 

Here is how our experts see it.

Carl Larry @oiloutlooks

 

I’m going to keep this oil related:

If Republicans take over the Senate?

I think that we’re looking a lot of change in the future of oil. There’s going to be more emphasis on American oil independence. This will include a more “fracking friendly” agenda, possibly another serious push for Keystone and more decisions about the viability of crude oil exports of American crude.

If Democrats retain the Senate?

We are stuck in the status quo. There might be some loosening around the idea of selling SPR crude to raise money (ala Bill Clinton) and reduce the minimum of oil reserves. Fracking regulations stay the course, but Keystone is dead until after 2016. Crude oil exports gets tabled until we see if there’s significant gains in production in 2015. 

If Democrats make serious gains in the House?

Cats and dogs living together, mass pandemonium. Seriously though, a major move here could make some major waves in the oil industry. Fracking regulations and the chemicals used may come under serious scrutiny. Rail car safety moves to the front of the list and we may see the East Coast get disconnected from the cheapest oil in the world. A chance that we may see oil taxes increased at the corporate level as these companies are making record profits on refining and an outside chance that the consumer sees an increase on gasoline taxes to take back some of the “irrational exuberance” of gas under $3.
 

Carl Larry is the president of Oil Outlooks and Opinions LLC. He provides daily oil market guesstimates with a dose of pop culture.

 

Source: bewareofdog

 John Caiazzo @jlc7111

 

If Republicans take over the Senate?

If Republicans take over the Senate perhaps something will be accomplished. Harry Reid won't even let the 300 proposed legislative items passed by the house get to the president's desk.

If Democrats retain the Senate? 

Status quo nothing gets done.

If Democrats make serious gains in the House?

Not likely.

 

John Caiazzo has over 40 years of experience at brokerage firms across the United States. He provides the end of week market wrap-up.

 

Source: Dion Hinchcliffe

Dan Gramza

 

Joni Ernst - GOP nominee in Iowa

I am bullish on the market and I expect positive market action to continue no matter which scenario occurs above.

Barclays noted that since 1928, the S&P 500 has posted a median return of 7% in the 90 days after a midterm, with returns positive 86% of the time.

If the Democrats keep control of the Senate, the expectation would be a dampened impact on the market but I still expect a positive stock market direction.

Since the Republicans favor the Keystone pipeline project and are against the tax on medical device companies to fund health care, the energy and medical device companies stocks may react positively, if the Republicans take control of the Senate.

Based on Ned Davis Research from 1900–2008, the combination of a Democrat President and a Republican Congress has produced the best historical returns from 1961-2010 for the S&P 500 index. Based on this study, the combination of a Democrat President and a Republican Congress resulted in an average return of over 21% for the stock market over this time period.

 

Political Control

Average Return for the S&P 500

Democrat President / Republican Congress

+21.3%

Republican President / Democrat Congress

+4.5%

White House / Congress Controlled by Same Party

+12.1%

Either Party in White House /SplitCongress

+7.1%

Source: MFS Investment Management.

 

The market perception of what the midterm election means will provide a reaction but not a long term trend. Corporate earnings continue to be positive and the economy continues to grind along in the right direction. I believe this will be the fuel that will drive the market in a positive direction as we go into the year end.
 

Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains.

 

Rod David

 

Confidence in the market can mirror the degree to which an investor agrees with the party dominating office. Mathematically, more people will be bullish, since electoral winners won a majority of voters. Having said that, don't be surprised by how many investors don't care either way, and simply invest. That's why neither party is really any better or worse for market performance. 

Figures lie, liars figure, and a lot of both will be swept into and out of office after Tuesday. Statistics and politicians—is there much difference between them? Statistical histories may give this market or that market more upside potential because one party or the other tends to be in or out of control. 

Arbitrary coincidence, and nothing more.

Their historical performances aren't likely to be identical at any given time. One direction has to correlate more closely to one party's victories. The first clue of their arbitrary relationship should be that it's often commented how the correlation seems counter-intuitive (bigger rallies during "anti-business" Democrat leadership). It's not counter-intuitive—it's irrelevant.

Political parties make a good living by exploiting the "confirmation bias" among voters. They stake out positions like a fisherman casts his line off the dock. The fish—err, I mean voters—only see the worm they want to see, and not the hook, so they bite. Hard.

Exit polling and rumors on Tuesday will offer more trading opportunities than the overall actual outcome. Races left unresolved in the wee hours may impact overnight trading in futures. Just more than half the market will be pleased, and less than half will be disappointed. The closest predictable investment for elections—perhaps this year more than most—continues to be champagne and kleenex.

 

Rod David develops analytical techniques that are designed to efficiently identify targets and turning points for any liquid stock or market in any time frame. He primarily analyzes S&Ps, generating several round-turn candidates daily.

 

Image Source: Theresa Thompson

 

Jeff Greenblatt @JeffGreenblatt

 

Alison Lundergan Grimes - Kentucky

I’m no pollster but what I hear is the GOP is getting the Senate. Wall Street is used to gridlock so they’ll welcome a GOP win. We might get momentary euphoria on such a victory which could present itself as a top. We don’t do politics here but it has to be tough on Obama if he has to take criticism from Jimmy Carter of all people. That being said if for some reason the Dems keep the Senate, the market ould have a huge sell off. The disappointment in many circles would be too much to take. 

It should be a GOP wave and I think traders have already factored in such a victory. I don't think the Dems have a shot at picking up seats in the House. But if they did—or really if they keep the Senate—traders will be disappointed and the market would sell. However, we have more cycles this week and could have another euphoria peak on a GOP victory.
 

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.

Alan Rohrbach @macromeister

 

Taking those questions in reverse order, there is no serious possibility that the Democrats will achieve any gains in the House.

On the other hand, in spite of the extremely low popularity ratings of President Obama and his minions, the swing toward the Republicans is more of a protest vote than broad-based enthusiasm. That is because the still highly fractious Republican Party has failed to lay out a clear-cut agenda.

And if the Republicans fail to take control of the Senate, they might as well disband as a party. If they cannot triumph even without a clear agenda in the context of the now extreme suspicion of the Democratic Party and the President, they likely do not have any reasonable future as a party.

Even if the likely outcome is Republican control of the Senate, the financial impact as reflected in the markets is likely to be a volatile two-way affair. The potential is for a more ‘constructive’ economic environment once the congressional logjam being enforced by Senate Majority Leader Reid is broken. That should foment quite a bit of stock market enthusiasm. This will also likely encourage further US dollar gains and weigh on government bond markets.

However, even with Republican control of both houses of Congress, the wildcard will be President Obama. The bullish market and economic anticipation is that he will move to the political center, and approve somewhat more business friendly legislation in order to improve his legacy. That would reinforce all of the more upbeat expectations in the wake of Republican success.

On the other hand, on past form it might even be more likely he retreats into the rigid ideologue positions. That will only become apparent a short time after the election results. It means there could be an initial constructive response to any Republican success that is reversed within a matter of days if there are any overt signs of stubborn resistance from the White House. It's going to be very interesting.
 

Alan Rohrbach is Lead Analyst and President of Rohr International Inc. He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.

 

Image Source: Donkey Hotey

 

 
FOREX.com

 

Regardless of the public’s lack of interest “rocking the vote,” the results of these elections will have a far-reaching impact for at least the next couple years. As it stands now, the Republicans may have the upper hand with polls pointing toward an all-but-assured victory in the House of Representatives (see map below), but the biggest development from these elections would be if the Republicans can wrest control of the Senate from the incumbent Democrats. 

If the Republican Party is able to capture a majority in both houses of Congress, they will be able to control the process of making laws, though President Obama will still be able to veto laws that are unable to achieve a two-thirds majority.

Source: www.270towin.com

As we go to press, many of the statisticians who make a living forecasting elections are giving the Republicans a 60%-65% chance of gaining the majority in the Senate, which would give them control of both houses of Congress. This could have major implications for everything from Obamacare to welfare spending; but, crucially for traders, a Republican majority in the Senate could mean that there won’t be another debt ceiling debacle like we had a few years ago.

Don’t go celebrating quite yet, though, because the lack of a debt ceiling debate means that the Grand Old Party could make cuts to government spending, which may be another blow to the economy that will be just getting used to life without quantitative easing.
 

This snippet of the full article on tomorrow's election was written by the team at FOREX.com: Matt Weller, Neal Gilbert, Kathleen Brooks, Chris Tedder, and Fawad Razaqzada. Check out more of their analysis, ranging from forex to commodities and more, on their website.

 

Be sure to check out all the other interesting slideshows in our "We asked traders" series here. And if you'd like to be a part of our next "We ask traders..." series, please e-mail social@futuresmag.com to be added to the question e-mail list.

About the Author

Lauren is the editorial assistant for Futures Magazine. She graduated from DePaul University in 2013 with a degree in English.