Stocks pushed deeper into record territory Wednesday in the wake of a big Republican win in Tuesday’s midterm elections. Not only did the GOP capture the Senate, with 52 seats locked up and another two likely, but the expanded their majority in the House of Representatives (to an extent not seen since the 1940s) and in the governors races as well.
Although bipartisanship has become something of a lost art in Washington over the last four years, with gridlock and budget battles the norm after the 2010 mid-terms gave Republicans control of the House, investors were apparently betting that the two parties are ready to come together to take action on things like corporate tax reform and skilled immigration.
In the end, the Dow Jones Industrial Average gained 0.6% while the Nasdaq Composite dropped 0.1%.
Energy led the way thanks to a bounce in crude oil on reports of a pipeline attack in Saudi Arabia. That lifted energy stocks by 1.7% after underperforming on Tuesday. Big tech stocks were a drag, however, with Google Inc (GOOG) off 1.6% and Intel Corporation (INTC) down 2.3%.
The excitement will continue through the rest of the week. Thursday will bring a decision from the European Central Bank, where pressure is growing to do something to address the recent slowdown in Europe’s economic performance. But this has been countered by an ongoing political backlash against ECB chief Mario Draghi’s leadership.
The pace and timing of the Federal Reserve’s interest-rate hike campaign will be back in focus on Friday when the October payroll report is released. Another strong report, which is expected, will remind investors that Fed officials believe interest rates will be north of 1% at the end of 2015. That means rate hikes could come as soon as March.
And finally, Friday’s meeting at the White House between President Obama and congressional leaders will provide clues as to the atmosphere in Washington over the next two years. Early indications suggest that the partisan rancor will only deepen. Republicans are eager to challenge Obama on issues like the Keystone pipeline, Obamacare, taxes and the budget while Obama has threatened to use executive action to do something about immigration.
At his post-election press conference Wednesday, Obama struck a defiant tone and couldn’t name a single policy area where he was looking to shift to the right in response to the election results. Instead, he seemed to interpret the vote as repudiating a lack cooperation between the parties, something he believed Republicans shared the blame in.
Unless something changes, Obama and Congressional Republicans could face off again as soon as December when the current budget resolution expires. A short-term extension would likely postpone the issue into early next year where the debt ceiling deadline in March looms large.
Despite the market’s gains, I recommended clients get off the ride on Tuesday by moving to cash and closing positions such as Catalyst Pharma (CPRX), which gained more than 13% for Edge subscribers between Oct. 23 and Nov. 4.
Remember that the market’s deepest and most painful pullbacks of this bull market have come in the context of fiscal fights out of Washington. There is every reason to believe that with Republicans in control of both houses of Congress, the fights will be bigger now.
Moreover, the market no longer enjoys the steady support of the Fed’s QE3 bond purchase stimulus program, which ended in October.
I’m also concerned that participation has been underwhelming in the market’s move off of the October 15 low. You can see this in the chart above, where only 57% of the stocks in the New York Stock Exchange are above their 50-day moving average — down from 65% in September and 83% back in July — respite the fact the Dow has never been higher than it is now.
Translation: The market is being held up by a narrow, fragile base of support.
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