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 U.S. investors appear less concerned with whether Republicans take
control of the Senate, as expected, or Democrats hang on to their
majority by a slim margin. They just want to know - come Wednesday
morning - the actual outcome.
"If we have a really uncertain situation, where the Senate is
divided and candidates are threatening recounts, that's really not
good," said Robbert van Batenburg, director of market strategy at
Newedge USA LLC in New York.
In two southern matchups - Louisiana and Georgia - polls show the
races are too tight to call, raising the potential for run-off
elections that could delay for weeks knowing who will control
Congress' upper chamber. Louisiana's run-off election is scheduled
for Dec. 6. In the market's worst-case scenario, the majority party
may not be known until after Jan. 6, when Georgia will hold its
run-off election if no Senate candidate wins at least 50 percent of
the vote on Nov. 4.
Such an outcome, while considered unlikely, nevertheless rekindles
uncomfortable memories for some of the 2000 presidential election,
when George W. Bush's victory over Al Gore was not confirmed for
more than a month after Election Day. That uncertainty contributed
to a spike of almost 11.2 percent in the CBOE Volatility index
<.VIX> and a 7.6 percent drop in the S&P 500 <.SPX> from Election
Day through the Electoral College vote in late December that
certified the outcome.
"While the reaction wouldn't be that dramatic this time, any form of
risk could really jolt equities, especially since the Federal
Reserve is no longer in the market," van Batenburg said, referring
to the U.S. central bank's decision last week to end its massive
bond-buying program, a stimulus measure which has been credited with
boosting equities.
CLARITY COULD ADD LEGS TO REBOUND
U.S. stocks have roared back in the past two weeks after an early
October scare fest. The S&P is up more than 8 percent since its
recent closing low on Oct. 15 and the VIX has tumbled some 45
percent.
A clear outcome on Tuesday, then, could set the market up for
additional upside into the end of the year.
Historically, midterm elections correspond with market strength.
Barclays noted that 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.
Upside in mid-term election years has historically favored
small-caps. Since 1990, the Russell 2000 <.TOY> has risen an average
of 4.89 percent between Election Day and the end of the year,
compared with a rise of 3.22 percent in the S&P over the same period
and a rise of 2.28 percent in the Dow.
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Those gains are close to the averages for all years, with the
Russell 2000 rising 4.6 percent in the last two months of the year
and the S&P up 3.2 percent in the last two months, according to the
Stock Trader's Almanac.
CONTROLLING PARTY
Barclays Capital estimates a 64 to 90 percent chance that
Republicans would win the Senate. With neither party likely to
achieve a large enough majority to overturn vetoes or prevent
filibusters, however, the actual party in power may not matter much
on Wall Street.
A "new composition is unlikely to enact changes in the near term
that will alter the direction of the equity market," Barclays wrote.
"If the election results are a surprise and Democrats keep control
of the Senate, we believe the market reaction would still be muted."
There could be outsized moves in the energy and medical device
sectors, two groups with ties to Republican-driven legislation. The
GOP is generally opposed to the Affordable Care Act's imposition of
a tax on medical device companies to fund the healthcare program,
and the party is widely in support of the Keystone Pipeline project,
which would connect Canadian oil sands with U.S. refineries.
"If the majority party of the Senate is in doubt, that would cause a
lot of volatility for medical device names like Stryker <SYK.N> and
Medtronic <MDT.N>, most likely with a downward bias," said Michael
Mullaney, chief investment officer at Fiduciary Trust Co in Boston.
(Reporting by Ryan Vlastelica; Editing by Leslie Adler)
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