A handful of toss-up U.S. Senate races next week could hold
the key to whether the stock market glides through the year-end in a typical
post-midterm election rally or gets hit with a fresh bout of volatility. 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.
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 and a 7.6 percent drop in
the S&P 500 from Election Day through the Electoral College vote
in late December that certified the outcome.
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 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.
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.
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.
Click
here to access the full article on Reuters.