The elephants romped through the midterm elections.
Triumphant Republicans have now picked up seats in the House and seized control of the Senate, for the first time in a decade.
So, what’s the takeaway for investors?
In short, a GOP-controlled Congress means new legislative priorities that could affect industries, corporate earnings, and share prices.
Here are five areas to watch:
Big energy
With Senate Republican Mitch McConnell positioned as the new Senate Majority Leader, the GOP will likely have the votes to put the long-delayed Keystone XL oil pipeline up for a vote as part of a government spending or transportation bill, and possibly force Obama’s hand.
Democrats have opted to move slowly on the $10 billion Keystone project to connect Canadian oil sands with U.S. refineries, thanks to stiff opposition from environmental groups.
Now, if the project gets a greenlight, it would be positive news for pure play oil sands companies, such as Canadian Natural Gas Resources (CNQ), Meg Energy (MEGEF) and TransCanada (TRP).
On top of that, Republicans want to open the controversial Arctic National Wildlife Refuge to oil and gas exploration. That could be a plus for energy stocks such as Schlumberger (SLB), Duke Energy (DUK) and Exxon Mobil (XOM).
Medical devices
One of the biggest post-election plays may be medical device stocks such as Medtronics (MDT), Boston Scientific (BSX), Johnson & Johnson (JNJ) and General Electric (GE).
These companies and others are currently saddled with a 2.3% tax to help underwrite the Affordable Care Act (Obamacare). Republican leaders want to repeal the levy and might now be able to attract enough Democrats disenchanted with the provision to get it done.
President Obama could go along if he’s offered concessions for other parts of his agenda such as immigration and infrastructure spending.
Defense stocks
Even before the mid-terms, weapons makers such as Lockheed Martin (LMT), Raytheon (RTN), General Dynamics (GD) and Northrop Grumman (NOC) have seen big jumps in their share prices since early August, thanks to increased U.S. military spending to defeat ISIS.
Republicans have traditionally been big advocates of increased defense spending and now they control Congress. That should provide another tailwind for defense stocks.
Wall Street
Since the financial crisis, Congressional Democrats and the White House have favored increased regulation and oversight of the financial services, accounting and insurance industries.
That resulted in the creation of the Consumer Financial Protection Bureau (CFPB) and the Dodd-Frank law, whose provisions are still being formulated by government bureaucrats at the Security and Exchange Commission and other agencies.
It would be tough for Republicans to ditch the CFPB, but the GOP could reduce Dodd-Frank provisions that some claim have increased business costs and restricted big Wall Street firms (which spent huge sums to support GOP candidates in the mid-terms).
Wall Street lobbyists want help easing the capital requirements for large insurance companies, limiting the power of the CFPB and lightening up on the regulatory scrutiny faced by banks deemed too big to fail.
If the GOP makes that happen, it could be a buy signal for big financial firms such as Goldman Sachs (GS), JP Morgan (JPM), Morgan Stanley (MS) and Bank of America (BAC).
Tax Reform
Republicans can no longer be the “party of no” as 2016 presidential elections loom. Meanwhile, the President may be looking for more legislative accomplishments to burnish his legacy. This could open the way for a modest deal on tax reform.
Neither party is crazy about U.S. companies hoarding profits abroad or relocating their headquarters overseas to avoid U.S. taxes.
One possible scenario is that both sides cut a deal to slash America’s corporate tax rates while imposing a minimum tax on foreign earnings.
The really (bipartisan) good news
Regardless of what happens in Congress, history shows that stocks usually head up in the 12 months following a mid-term election regardless of which political party prevails.
Since 1946, the market has gained 15.3% on average in the first six months after a midterm, and 17.5% on average a year out.
Onward to 2016!
Continue learning: The surprising impact of mid-term elections on your investment portfolio
DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
