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Conventional wisdom holds that Wall Street likes the stability produced by partisan gridlock in Congress. That's not true anymore.

Wall Street now wants Republicans, with a presumably pro-corporate and antiregulation agenda, to emerge from the midterm elections with majorities in both the Senate and House of Representatives.

"We would view a Republican-controlled government as positive ... as we believe it will partially mitigate and deflect the calls for increased bureaucratic intrusion into the capitalist system," said Kent Engelke, capital markets strategist at Anderson & Strudwick in Richmond, Va.

Most on Wall Street would agree, although a Republican sweep also could mean expanding budget deficits due to a combination of lower taxes and increased spending.

"I think you're at a point now where important legislation that could help the economy is now hopelessly tied up," said Greg Valliere, managing director of Charles Schwab's Washington research group. "I think that the biggest plus, if one party controlled both houses, is to break this paralysis."

Street-Friendly Goals

Washington watchers can point to a number of Street-friendly policy goals of the Bush administration, which a Republican Congress would very likely support. And they say Democrats have failed to offer a similarly comprehensive program. Among what the Street wishes for from a Republican-controlled government are the following:

An end to gridlock: Passing a budget amendment, as well as bills on homeland security, terrorism insurance and energy, are seen as key.

Tax cuts: The Bush tax cuts, now set to expire in 2010, will be made permanent. Tax cuts for small business and a faster depreciation schedule for corporations also could get consideration.

Shareholder-friendly initiatives: Increasing the deduction for capital losses from the current $3,000 level and ending the double taxation of dividends are expected proposals, as well as the elimination of the alternative minimum tax.

Tort reform: Capping jury awards would do wonders for companies with potential asbestos liabilities, as well as tobacco manufacturers.

Prescription drugs: Both parties want Medicare reform, but Republicans are likely to limit cost controls on prescription drugs, a concern of big pharmaceuticals.

Privatizing Social Security: The bear market has taken some steam out of the idea, but then-candidate Bush supported individual controls over Social Security benefits, and Wall Street would love to administer such programs


Guns, butter and more guns: With war with Iraq looming and the ongoing battle against terrorism, defense spending is almost certain to rise. Republican control would likely result in even higher military expenditures, including projects such as missile defense.

While it's not part of the legislative list, Wall Street also hopes Republicans will take a more

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approach to corporate reform and regulation of the scandal-ridden securities industry, which has given 54% of its campaign donations to Republicans, according to the Center for Responsive Politics, a nonprofit organization.

Still, Republicans can at best hope for slim majorities in both houses of Congress. "It's na¿ve to suggest you'd get the enactment of sweeping reform legislation," Valliere said, noting that tax-cut and spending bills require a "supermajority" of 60 votes in the Senate and that it takes 67 votes to defeat a filibuster.

In fact, some are calling this the "status quo" election. The odds at the end of the campaign favor Republicans retaining control of the House and Democrats maintaining control of the Senate, according to the

University of Iowa's Electronic Stock Market.

For Every Silver Lining, a Cloud

Still, if Republicans do sweep on Nov. 5, there might be some negative economic consequences. And President Bush may have regrets in 2004 if a Republican majority fails to pass significant legislation and/or get the economy moving again.

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The Congressional Budget Office now is forecasting deficits will continue through 2005 and that the total surplus for 2003 to 2012 will be just over $1 trillion.

Trouble is, the $1.35 trillion tax-cut legislation sponsored by President Bush in 2001 and passed by Congress was based on prior CBO forecasts for a surplus of over $5 trillion in 2011. The surplus is rapidly eroding, but Republican support for the tax cuts is unwavering.

Combine that with seemingly unfettered spending across a host of areas and it's likely that federal deficits will widen further.

"Essentially, George W. Bush ran on a platform of being a tax-cut-and-spend Republican," said Steve Soukup, a political analyst at Lehman Brothers in Washington, D.C. "Both in Congress and what the administration has pushed there has not been a whole lot of fiscal discipline. Republicans may wish to make the argument they're holding the line on spending but that hasn't proven to be the case."

Rising budget deficits mean increased issuance by the U.S. Treasury, which may not prove to be to the bond market's liking.

"I'm reluctant to say the bond market will have a big selloff the day after the election, but as a long-term concern the fixed-income markets might be nervous the Republicans would advocate deeper tax cuts without showing much restraint on spending," said Schwab's Valliere. "It's a legitimate fear."

Weakness in the bond market would prove disheartening to investors who've put nearly $120 billion into fixed-income funds this year through September (vs. outflows of $18.7 billion for equity funds), according to the Investment Company Institute. And higher rates, should they emerge because of rising deficits (or any other reason), would result in higher borrowing costs, potentially choking off the recovery.

Bottom line, a Republican sweep doesn't guarantee anything for stock and bondholders, whose interests may or may not be aligned with Wall Street's.