Five Ways the GOP Election Victory Could Affect Investors

 

WASHINGTON (TheStreet) -- In politics, nothing is certain. But Tuesday's election could finally break the stalemate in Washington.

For investors, the stakes are critical. Tax reform, the budget deficit and defense spending are just some of the issues that might gain renewed momentum from a Republican-controlled Congress. Though the change in Washington's power balance is relatively modest, the GOP's negotiating position is clearly much stronger. Congress will be able to pass legislation and dare President Obama to veto it.

Here, then, are five areas that investors should be watching over for the next two years as the power struggle between Congress and the president shifts to reflect the new political balance.

Corporate Tax Reform

With both chambers in Republican control, the chances of corporate tax reform are greatly increased. A deal on cutting rates and eliminating exemptions could be done that could gain the support of some Congressional Democrats and President Obama.

Such a reform would benefit companies that pay close to the full 35% tax rate and penalize companies like GE (GE) that take aggressive advantage of the current over-complex tax code.

Monetary Policy

Both the House and the Senate will now be dominated by hard-money conservatives. That includes Sen. Richard Shelby (R.-Ala.) and Rep. Jeb Hensarling (R.-TX) as heads of the Senate Banking Committee and the House Financial Services Committee.

Fed Chair Janet Yellen is forced by law to appear before both committees at least twice annually. This provides an opportunity to question or indeed harass the Fed on the subjects of monetary policy and bank regulation under the Dodd-Frank Act (which Republicans oppose).

Further, there are two pending vacancies on the Fed Board of Governors. President Obama will appoint new governors, but the Senate must approve them.

The Republicans thus have plenty of opportunity to push the monetary policy debate in the direction of higher interest rates, which most of them favor, including Hensarling and Shelby. Should they succeed, share prices are likely to drop back and some sectors such as mortgage REITs will be badly affected.

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The Budget Deficit

With both the House and Senate controlled by Republicans, budgets will reflect GOP priorities. That means generally less spending and a smaller budget deficit.

Investors should benefit generally from this, but shares in government contractors will suffer, as will "new energy" companies benefiting from government subsidies.

Defense Spending

Republicans want a reversal of the recent decline in defense spending, especially with the ongoing conflicts in the Middle East and Ukraine. That's good news for defense contractors such as Boeing (BA) and Lockheed Martin (LMT) .

Cuts in Corporate Subsidies

While the Republican leadership depends on corporate donations and favors corporate welfare, the strong Tea Party wing doesn't.

A particular target is the U.S. Ex-Im Bank, which makes concessionary loans to foreign countries to buy U.S. products. Boeing  is a huge beneficiary here and will suffer if U.S. Ex-Im Bank is abolished or even if its activities are curtailed. Lockheed Martin, having less civil airliner business, isn't as vulnerable.

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