Republican-Controlled Congress Won’t Halt Wall Street’s Run Higher
Win, lose, or draw, the two phrases often heard on the street after a hotly-contested, high-stakes election season are: “Elections have consequences,” and “now is the time for new, bold ideas.” They’re rally cries in theory, but in 2015 and 2016, will they play out in practice?
Washington seems to have its work cut out for itself with the books closed on midterm election season, the Republicans find themselves in control of both chambers of Congress with a lame-duck presidency in place, and voters hungry for change. The question is: Will the nation see more of the same overpromising and under-delivering, or will this usher in a new era of government. But more importantly for investors: How will the changes on Capitol Hill impact their bottom lines?
So far this year, the Dow Jones Industrial Average has enjoyed a 5.4% increase, while the broad-based S&P 500 has jumped nearly 10%. It’s the latest piece of the five-year bull-market puzzle, and one of the most hated rallies in Wall Street’s history, as investors continue to call for corrections that, to this point, haven’t substantially materialized.
So with a new Congressional majority that faces stiff opposition from Democratic rivals in the White House, one possibility is for the run-up in stocks to finally slow, or show signs of a much-anticipated correction. But Jofi Joseph, an analyst for Global Risk Insights, says despite the political shift in the nation’s capitol, he doesn’t see a change to the markets’ status quo.
“If a correction occurs in the coming months, it will be because of [European] recession, the crash in oil prices, disappointing earnings reports, and a slowdown in U.S. consumer spending. Political battles in Washington will not matter all that much,” he said.
Instead, it paves the way for a majority party, which tends to favor pro-business policies, to prove they have the chops this time around to pass legislation and get work done. For Wall Street, Joseph said a political power shift means changes at the margins, not an opportunity for total overhaul in sentiment. He predicts rather than a downward shift to the markets, Wall Street’s rally will roll on. He’s calling for a positive longer-term reaction.
Bob Doll, chief equity strategist and senior portfolio manager at Nuveen Asset Management, is also calling for a similar sentiment to prevail. He said the reality for America – and the markets – is that for the last several years, the nation has seen intense gridlock from the nation’s political leaders. Compared to that, the next two years will likely look more amicable.
“The probability to get stuff done goes up given the current Congressional configuration,” Doll said. “But posturing for 2016 has already started and that’ll be the excuse for everything (that doesn’t happen) at this point.”
Doll further emphasized that point, saying he expects little victories like progress on smaller political issues like the Keystone XL pipeline, and the medical device taxes. However, lawmakers may have to wait to handle bigger issues like immigration reform and the tax code.
“I’m not so sure (legislative action) will be more business friendly,” he said. “The worst thing would be for Republicans to not care about the president and send bills like bullets to show they can get stuff done. The worst thing the president could do is exercise executive orders on issues like immigration reform. Right now, we have this period and hope of cooperation…hopefully both parties will get the message.”
Action or Inaction: That is the Question
On the table now, are a host of issues that could shake out a reaction from Wall Street, including corporate tax reform, energy reform, continued job creation initiatives, and whether there’s a need for more regulatory oversight of Wall Street.
Doll noted with just short of a year before presidential election-year campaign season ramps up, it’s unlikely Congress or the president will attempt to touch issues like tax reform, though it’s arguably one of the most wide-reaching and hotly debated policies for both Wall Street and Washington.
On the opposite side of the coin, Greg Valliere, chief political strategist at the Potmac Research Group said in a note late Wednesday night the Republicans will likely try to poke the sleeping tax giant…but not enough to totally wake it up. He predicts an all-cards-on-the-table approach to tax reform that calls for a supply-side reform, new spending, and a reduction in government regulation.
“Whether big reforms can pass in the next two years is doubtful,” Valliere wrote. “But simply by putting these issues on the table, Republicans will launch a national dialogue on new priorities that will be highlighted in the 2016 election – forcing the Democrats to explain what they would do.”
Valliere also sees an attempt at dealing with the issue of corporate tax inversions, which have come under intense scrutiny with deals like Buger King (NYSE:BK) and Tim Hortons (NYSE:THI), and the shelved deal between Pfizer (NYSE:PFE) and AstraZeneca (NYSE:AZN). Still, he said it’s unlikely both sides can come to an agreement since the White House likely wouldn’t accept a deal that wouldn’t raise revenue, and Republicans wouldn’t agree to increase taxes.
“Investors will have to closely monitor this issue,” Valliere wrote. “It may be the first quarter of this game, but reform is coming. It may take awhile – chances of enactment in 2015 or 2017 depend on a White House that’s not known for its negotiating skills.”
On the regulatory front, GRI’s Joseph said the new Congressional power balance will likely mean more breathing room for Wall Street – especially on controversial issues like high-frequency trading, and big banks that are seen as “too big to fail.”
“Oversight will be considerably more restrained and Wall Street execs won’t have to worry about being paraded in front of the klieg lights for sensational Congressional hearings,” Joseph said. “That said, the administration will still retain considerable tools at its disposal for monitoring and cracking down on financial abuses, so Wall Street will not be off the hook entirely.”
To that point, David Joy, chief market strategist at Ameriprise Financial, said the idea of further regulations following controversial Dodd-Frank legislation put in place in the wake of the 2008 crisis, are essentially baked in Wall Street’s cake at this point.
“On the regulatory front, Wall Street absorbed regulatory initiatives and moved on, it seems. I don’t expect much rollback of some of the reforms that have been instituted by Dodd-Frank. In large terms, I don’t see big change,” Joy said.
It’s not just regulatory oversight Wall Street will continue to monitor: As the price of crude oil in the U.S. swoons, and the U.S. continues to find new ways to access natural gas, energy policy comes back into play. And with hundreds of billions of dollars tied up in the nation’s largest energy companies, the decision-making in that arena becomes a bigger issue on the Street.
Joy said Keystone and the issue of energy exportation reforms are big issues Wall Street could rally behind due to the potential for job creation benefits. He added, though, Keystone is more a symbolic issue at this point due to a final rule expected from Congress for more oil delivery by rail. It’s a point PRG agreed on and projected the pipeline to be one of the Republican Congress’s first big energy votes…likely met with a veto from the president.
Still, Doll added any decision on policy is likely a net positive compared to the gridlock and lack of decision-making the country has seen for the last several years.
“The energy story in the U.S. changed radically from a major exporter to ‘fracking’ to produce energy, but policy hasn’t changed,” Doll said. “How do we feel about natural gas exports? I’m of the view that a resolution good or bad is better than just waiting and seeing what Washington will do.”