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Experts had predicted a strong showing for the GOP during yesterday’s election. But I think few people were expecting the flurry of Republican victories that we witnessed during the late-night election coverage last night.
The major market indices haven’t reacted much today, either because a Republican majority in the House and Senate was priced in or because the market just doesn’t care. I’m inclined to think it’s the former since “experts” have been predicting a Republican majority for a few weeks now. The big question is whether or not the Republican win is good for stocks.
Let’s consult a chart.
The last time that the GOP took both the House and the Senate with a sitting Democrat President was in the 1994 mid-term elections. Bill Clinton was partway through his first term as President and his party suffered a big loss.
What happened to stocks? UBS’ Julian Emanuel notes that the chart below illustrates the way “markets pause, hesitate, then begin a bull run in 1995” after the big Republican win in the 1994 mid-term elections.
Source: Business Insider
This bull run lasted until the Dotcom bubble burst, a run for the S&P 500 of almost 250% over five years.
Does this chart mean that stocks are going to take off sometime in the next month and not look back for five years? In a word, no. Or, at least, probably no. The UBS analyst offers his opinion on this matter, that “history doesn’t usually repeat, but it often rhymes.” If true, we could be on the precipice of a major bull run.
But stocks were considerably cheaper then, trading at a PE of just under 15 compared to today’s PE for the S&P 500 of 19.55. That means stocks are roughly 31% more expensive now then they were after the mid-term elections of 1994.
Certainly a Republican House and Senate will try for an outright-repeal of the Affordable Care Act (ACA), considering how many times the Republican controlled House has already tried.
But there’s no question President Obama will veto these attempts. And despite their big win, Republicans don’t have the votes to override a Presidential veto. That requires a two-thirds majority of both the House and the Senate.
Indeed, it seems like more of the gridlock we’ve seen over the past few years is ahead. And that’s not necessarily a bad thing for stocks. Consider that the S&P 500 has risen over 40% in the last two years despite all of the gridlock and general uselessness of our elected representatives in Washington.
Will the GOP victory change things in DC? I’d argue that it won’t change much, though not having a Democratic majority in the Senate removes a layer of political insulation for the President. The House and Senate will undoubtedly send a lot more controversial bills to President Obama and he’ll undoubtedly have to use his pen to veto these bills.
It is hard for me to envision a scenario in which a Republican majority in the House and Senate is bad for stocks. But whether or not the Republican win is good or bad for stocks depends on what the Republican Congress is able to get signed by President Obama.
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