What Does a Republican Controlled Congress Mean for Investments

In order to gain control of the Senate, Republicans must pick up six additional seats during Midterm elections. Polls suggest that Montana, West Virginia, and South Dakota will be easy wins for Republicans. Polls are also showing GOP candidates widening their lead in the once too close to call states of Kansas and Georgia. That pretty much leaves one win needed in the toss up races for seats in Alaska, Arkansas, Colorado, Iowa, Louisiana, and North Carolina.

Republican elections

With Obama currently sitting at an all time low in poll numbers and with history as our guide, it seems unlikely that the Democratic candidates will win all six of these closely contested races. In general, the incumbent party doesn’t tend to do well in Midterms, and especially while the sitting President has such dismal approval ratings, currently hovering below 40%. So, regardless of your political affiliation or preference, it is likely that the Republican Party will control both the House and the Senate for the next two years.

For the past six years, Barack Obama has enjoyed a Democratic Senate that has blocked proposals brought to the floor by the Republican controlled House of Representatives. If he loses that buffer Obama will be forced to either sign or veto every bill brought forward by Congress. While the possibility exists for continued political paralysis where we see nothing meaningful out of government for another two years, we feel this is an unlikely outcome.

The American people are tired of the polarization in Washington and expect some cooperation to pass necessary legislation. The backlash toward Republicans after shutting down the government last year has taught the Republican Party an important lesson – if they are to take control of both arms of Congress they can no longer just stand aside and shout down everything that Obama and their Democratic counterparts attempt to pass. They will be forced to show that they have a positive agenda or risk another voter rebellion in 2016 for not only Congressional races but the Presidential race as well.

Additionally, Obama is unlikely to simply ignore Congress and continue to use executive orders and federal regulations to accomplish his goals. If the President wishes to improve his legacy in his final years, he will be inclined to find areas of common ground in order to make lasting changes. So if both sides are incentivized to accomplish something, if anything at all, what are some areas that might garner bipartisan support?

There is a chance that we’ll see pro-growth legislation in long stalled areas of policy such as free trade, corporate-tax reform, deficit reduction, and federal highway funding. All of which would be beneficial to businesses and the overall economy in general as these are areas that should help to create jobs.

On the subject of taxes, a bipartisan deal is likely to address the problem of American based corporations hoarding profits overseas solely for tax reasons. Recent headlines about companies leaving the country entirely for tax purposes have created a scenario where both sides understand the harm caused by excessive U.S. government taxes on a firm’s profits earned abroad. Legislation like a “repatriation holiday” is likely in an attempt to allow companies to bring that money back and spend it at home. This would be a net positive for the companies, their shareholders, and the economy as a whole.

Sectors like the natural resource sector and defense sector may also be beneficiaries of a GOP lead Congress. Republicans are seen as “friendly” to the natural resource industry and would certainly ask Obama to approve the long-delayed Keystone pipeline. Even though environmentalists hate the project, a veto would be unlikely as it is a major job creator and our economic recovery is still somewhat tedious. Additionally, since Canada is currently building alternative pipelines to ship their tar sands crude oil and gas overseas to both Asia and Europe, blocking the Keystone pipeline only impacts the U.S. economy negatively.

Easing restrictions on the exportation of oil will likely continue, benefiting not only energy producers but oil and natural gas shipping companies as well. The U.S. continues to produce a glut of oil and gas, and with energy costs much higher around the world an opportunity to profit from this price disparity exists and is restrained only by outdated regulations enacted in the 70’s. Another area of the energy industry that may see some reprieve is in the coal sector. While the EPA’s attacks on the coal industry will not disappear and improved emission standards should be embraced; the attacks may lessen because it is a job creating industry. Republican wins in coal producing states such as West Virginia will be an indicator of where the people’s priorities stand.

The Defense Sector is yet another potential beneficiary as Republicans are generally seen as hawks on National Security and foreign policy. Continued unrest in the Mideast would be the primary driving force for increased defense spending but so would immigration reform to a lesser degree. Any Republican compromise on immigration policy will include more border security, new systems to catch visa over-stayers, and unlawful job applicants. You should expect to see increased spending in these and other areas under the jurisdiction of Homeland Security.

Some sectors that may suffer from a GOP victory tomorrow may be Renewable Energy as funding for some of these projects are likely to diminish in a Republican budget. There may also be a knee jerk sell off in the health care industry as a Republican win would be viewed as a vote against Obamacare. However, it is unlikely to have a long term effect on the sector, as Republicans will push through a “protest bill” dismantling the Health Care Act and Obama will veto it. While the GOP may win some small concessions to the overall bill, Obamacare is here to stay as proved by the 50 failed attempts to repeal the law since it was passed.

We will know soon enough who will control Congress for the next two years. Only time will tell if we see bipartisan support for any positive legislation or if we continue to see ineffective polarized bickering for another two years. For good or for bad, politics affect your investments and you should be prepared to take advantage of any outcome regardless of your personal political ideals.

 

This article contains the opinions of the author but not necessarily the opinions of Vulcan Investments, LLC. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.