The country awoke today to a surprisingly strong number of Republican wins in the U.S. Senate, as well as a strengthened Republican position in the U.S. House and in the gubernatorial seats across this country. It was a strong win across the board if you are of the “R” persuasion.
This is just a short note with our observations and impressions about these outcomes as they may impact companies and trends going forward. And it’s admittedly just our first impression. (To keep this epistle from being too long, I’ll refer to the ticker symbols for those companies we think may most be affected).
The Outcome
The Senate — As of this morning Republicans had won seven Senate seats (they needed six to gain a majority), giving them 52 seats. Alaska was still being counted, but the Republican was 4 percent ahead with 97% of the ballots counted. Virginia leaned slightly Democratic with Democratic Senator Mark Warner ahead while Louisiana was headed for a run off in early December. Those two seats may split, and if they do it will provide the Republicans with a nine seat gain. The average gain by the opposition party in a 6th year midterm election year is six seats, so nine is a very big deal. In 2006, for example, the Democrats gained six seats thanks to an electorate tired of the leadership of George W. Bush.
The House— Republicans added to their strong position by picking up twelve more net seats. Some races remain in dispute, but the twelve will give the Republicans their largest House majority since 1945, and should they win a few more of the still outstanding races they’ll have a majority they’ve not seen since the Great Depression.
Gubernatorial Races ““ Republicans expected to lose one or two seats here, but nearly every close race moved to the Republican side. They retained their positons in Florida, Wisconsin, Georgia, Michigan and Maine, losing in Pennsylvania. (The Pennsylvania challenger, Tom Wolfe, was the only Democrat to have unseated a Republican incumbent so far). The Republicans also picked up traditional Democratic strongholds of Massachusetts, the President’s home state of Illinois and Maryland. Races in Connecticut and Colorado are still too close to call.
The Implications
1. Fill Your Wagon with Equities.
With the Senate results now being known and no longer uncertain, and with divided government now assured between the Executive and Legislative branches of our federal government, stocks should react favorably for the next twelve months if history is to continue to be our teacher. (I’ve written about this phenomenon a number of times. Here’s the most recent “Keep The Faith,” written at the market’s bottom in mid-October). The average annual return for those periods with a Democrat in the White House and the Republicans in control of Congress has been 15.3%
No major legislation is likely to pass these next two years, given the poisonous relations we’ve witnessed between the leaders of those two branches the last six years, but no news in Washington has historically meant good news both on Wall Street and for Main Street’s equity investors.
2. Expect Low Prices at the Pump and Continued Job Growth in the Oil Patch.
The Keystone Pipeline project, under review for over six years with little action despite bipartisan Senate support, now has the 60 votes in the Senate needed for passage. When built it will connect Canadian oil with U.S. refiners along our Gulf Coast. It remains to be seen if the President will veto it, or if that veto will be overridden. But Tom Wolfe campaigned on raising taxes for natural gas production (fracking) in PA. I expect XL pipeline approval, more drilling and an effort to increase LNG exports. This will help companies like COG, PWR, TRP and BHI.
Legislation introduced in 2013, The Natural Gas Pipeline Permitting Reform Act, aimed to shorten the time for the federal review of natural gas permit applications. The Senate never voted on this House-passed legislation because of a threatened Presidential veto. Now it’s likely to become law. Federal lands represent 25% of all oil reserves and 28% of dry gas reserves. Fracking on federal lands could be an energy igniter. Literally. Expect a Republican push to light this fuse.
3. The medical device world will change.”“
Obamacare imposed a 2.3% tax on the sale of medical device makers in 2013 which they have fought ever since. Although there was strong support previously in the Senate to eliminate or moderate that tax, no action has been taken to date since Majority Leader Reid didn’t want to take away revenue used to help finance ACA expansion.
I expect we will now see repeal and the makers of those devices (BSX, SYK, BAX) will see their margins grow.
4. The old debt ceiling battleground will not be revisited.
You will remember the bloodletting in 2011 over the debate on raising the debt ceiling with the Republicans being the party most badly gashed and left bleeding on the curb. I don’t expect them to revisit that battle on that turf.
5. Trade will become a Big Deal.
The Trans-Pacific Partnership (TPP) is a tariff-free agreement with eleven other countries with the intent to foster free trade. If passed fracking would likely increase significantly, so environmentalists are reticent, as has been the President. With Republicans in control of Congress and with the President enamored of executive authority and powers, now perhaps
a deal can be done.
6. Defense will become a bigger consumer of GDP for the government.
Now that John McCain will likely become a key chairman, perhaps of the Armed Services Committee, and since Raytheon is in his home state, we will see a greater allocation of government resources to our defense industry. Growing geopolitical uncertainty should help LMT, GD and NOC
as well as RTN.
7. Coal may no longer be King but it will still be a Prince.
With Mitch McConnell at the helm as leader of the Senate we will see determined efforts to slow down EPA rules that impact both coal and manufacturing companies. Nevertheless, coal will continue its slow death march, I believe. Sometimes radiation and chemo just retard the dying process, rather than ending it. Look for BTU and CNX to benefit.
8. There remain a number of issues where common ground may be found.
We have a dear client with whom I just spoke. He is of the mind that the President will follow the lead of President Clinton in 1996. You will remember that the Lewinsky scandal led to impeachment proceedings but nevertheless that President and the conservative leader of the Congress, Newt Gingrich, were able to find common ground on welfare reform. My colleague believes President Obama will find agreement with Senate Majority Leader McConnell. I hope so, but admit I have a more sanguine attitude. Time will tell.
Having been an elected official many years ago I remain acutely interested in public policy. Let’s hope we are as pleasantly surprised with progress and compromise now as we were in the
mid-90s.
As I put down my pen I see that the Dow Jones has reached an all-time high. Keep the faith.
(Murray Sawyer is Managing Partner at Westover Capital Advisors, LLC, Wilmington, Delaware.)
