Most financial stocks were in rally mode Wednesday, celebrating the re-election of President Bush.

The Philadelphia KBW Bank Index rose 1%, with many brokerage stocks also posting strong gains. Among the winners were

Charles Schwab

(SCH)

, up 20 cents, or 2%, to $9.64, and

J.P. Morgan Chase

(JPM) - Get Report

, up 75 cents, or 2%, to $39.30.

Merrill Lynch

(MER)

added 78 cents, or 1.4%, to $55.32.

Of course, financials weren't the only stocks posting strong gains in the aftermath of Bush's nip-and-tuck victory over Massachusetts Sen. John Kerry. But some of the sector's gain was no doubt due to the belief on Wall Street that a Bush victory, coupled with continued Republican control of Congress, will lead to further tax cuts and policies favorable to investors.

In a second term, Bush is expected to make a partial privatizing of Social Security a major priority. The administration's proposal to let workers invest some portion of their Social Security taxes in the stock market could be a boon for Wall Street brokerages.

A Bush victory also means there's little danger of Congress rolling back the dividend-tax cut enacted last year. It could also lead to further tax cuts, putting more money into the pockets of investors and consumers.

"A Bush victory generally means taxes won't be raised and the economy can continue to expand," says Michael Stead, a portfolio manager with Wells Capital Management, who invests mainly in financials. "Banks will continue to be able to grease the wheels of the economy and loan demand should start to increase."

Stead says he's not particularly concerned about the nation's budget deficit, which is expected to reach $422 billion in the just completed fiscal year. Many on Wall Street believe economic expansion will close the gap, noting that the Congressional Budget Office expects the nation's revenue shortfall to shrink to $375 billion in the current fiscal year.

Bond traders, however, expressed doubt Wednesday about the Bush administration's ability to reduce the deficit. While stocks were soaring, Treasury notes were getting battered, with the yield on the benchmark 10-year Treasury rising to 4.14% from 4.10%. At one point, the yield rose to as high as 4.17%.

Meanwhile, not all financial stocks were partaking in the postelection celebration.

Shares of

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

both were down because of abelief that with Republicans controlling Congress, tougher regulation for the government-sponsored mortgage finance firms is inevitable. For the past two years, critics on Capitol Hill have been clamoring for greater regulatory oversight of Fannie and Freddie in the wake of major accounting scandals at both companies.

Fannie was recently down $2, or 2.8%, to $69.42, while Freddie dropped $1.19, or 1.7%, to $66.05.

Also falling were shares of mortgage lender

Countrywide Financial

(CFC)

. But the decline in Countrywide's stock had little to do with politics and stemmed more from lower expectations for future earnings.

Just a few weeks after reporting disappointing third-quarter earnings, the mortgage lender released updated earnings guidance for 2005 that was pretty much in line with Wall Street's already diminished expectations.

In the coming year, the nation's third-largest mortgage bank expects to earn between $3.25 and $4.25 a share. Before the announcement, the consensus estimate had Countrywide earning $3.83, with estimates ranging between $3.20 and $4.25, according to Thomson Financial.

In early morning trading Wednesday, Countrywide shares were down 81 cents, or 2.5%, to $31.68.

Countrywide's stock has lost 16% of its value since the company reported earnings on Oct. 20. A year ago, the stock was one of the hottest on Wall Street as it feasted on the booming market in mortgage refinancings. But rising interest rates quickly put an end to that source of higher revenues for mortgage lenders.