Midterms: Eight things every investor should know

Cashin says election next market catalyst
Cashin says election next market catalyst   

By election standards, Tuesday's midterm vote isn't exactly the sexiest, even if it could end up with the Republicans taking both houses of Congress.

Barely one-third of potential voters have given much thought to the House, Senate and state government races happening across the country, according to recent Gallup numbers that point to low voter turnout.

Still, the final national races before the 2016 presidential contest hold potentially important consequences for investors and business people. Here are eight things people on Wall Street are talking about:

1. First, for the really good news ...

Most polls, including the latest Wall Street Journal/NBC News survey, show expectations—though less-than-overwhelming—that Republicans increase their control on the House and take control of the Senate. Historically speaking, a Democratic president and a Republican Congress has proven the strongest mix for the S&P 500 stock index.

Since 1945, that combination on average has resulted in a 15.1 percent average annual gain, which ties for first with what happens when the GOP controls both chambers plus the presidency, according to Sam Stovall, U.S. equity strategist at S&P Capital IQ. In a note to investors, Stovall broke down the various scenarios and provided some advice on what to do should the most likely outcome transpire:

History says, but does not guarantee, that the political scenario of a Democratic President and a Republican-controlled Congress holds great promise for domestic equities. With that in mind, S&P Capital IQ advises three things: 1) Stay long—the S&P 500 has historically gained 5 percent-8 percent AFTER getting back to breakeven from a pullback (decline of 5 percent-10 percent), 2) Emphasize Cyclical Sectors—In the November-April period since 1990, a 25 percent exposure to the consumer discretionary, industrials, materials and tech sectors gained 9.9 percent vs 7.2 percent for the S&P 500, and this combination beat the market 75 percent of the time, and 3) Focus on high-quality stocks—those issues that have had an above-average consistency of raising their (earnings per share) and dividends in each of the past 10 years are trading at a double-digit discount to the S&P 500. They usually trade at a premium. Only time will tell if this historical record skips or plays on.

Election polling place voting booth
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2. But hold on a second

One problem with that analysis: It's based on a small data sample, with just eight years of history over the 70-year span. Trying to play the market based simply on which party is in control is a dangerous game, as Dan Greenhaus, chief strategist at BTIG, pointed out in a tweet Monday.

3. The midterm market

So with all that in mind, we'll issue a caveat that the next measure has just a 21-year history encompassing five elections. But the SPDR S&P 500 exchange-traded fund has blossomed after midterms, returning 13.8 percent in the 10-month period after the election against just 3.5 percent in the 10 months before, according to a somewhat quirky analysis from State Street Global Advisors (you don't usually see these things encompass overlapping months).

Read MoreThe hourly guide to Tuesday's election

"When you have your sails cleared on what the future outlook for policy might be, whether that's policy you agree with our not, it usually leads to stronger returns ahead," said David Mazza, head of research at SSgA.

4. Republicans aren't magicians

Surveys also are showing that, at least on Wall Street, there's optimism that a Republican Congress will be more friendly toward business. But the chances of the GOP being able to make landmark changes are dimmed by what likely will be a continuation of an acrimonious relationship with Democrats as well as a majority that likely will be far from veto-proof should President Barack Obama stand in the way.

"Voter discontent will give the GOP control of the Senate, but Americans quickly will become as disenamored with a new cast on Capitol Hill," University of Maryland economist Peter Morici wrote in an analysis, in which he concluded: "Americans are correct to demand change, but at all levels the parade of incompetency will continue until Americans reckon with the changes they need to accept."

Read More4% economy possible with 'right election': Welch

5. The House still matters

Much of the election chatter has focused on whether Republicans will wrest control of the Senate, but the strength of GOP control in the House, and any lingering infighting among the party itself, also is important. Beacon Policy Advisors, an independent research firm that caters to institutional investors, breaks down a scenario in which it expects the party to take a stronger turn to the right:

The divide within the House Republicans between the establishment and conservative wings of the party have led in the past to standoffs such as the government shutdown and debt limit crises, and both issues will ripen again next year. Even if the GOP can win a Senate majority, there remains the question of whether, and to what degree, the House Republican dysfunction will continue. ...

There will also be 20 other new faces due to 14 retirements and six current members running for Senate. Many of these seats are deeply red districts and the new representatives could be more conservative than the members they are replacing.

6. All eyes on energy

The Keystone pipeline could be the biggest winner of all with a Republican sweep, as Obama has managed to stonewall the project by waiting for a Nebraska court challenge by environmentalists to get settled. But with public support growing for the project, which would carry 830,000 barrels per day from western Canada and the Bakken Shale, a GOP win could seal its fate.

Read MoreIn some states, cheap oil isn't such a good thing

Ian Gordon, forex strategist at Bank of America Merrill Lynch, said the result would be a further decline for oil prices—to the $75 per barrel neighborhood—and more pressure on the Canadian dollar:

Canada faces a Dutch Disease given its increasing reliance on energy exports, creating longer-term pressure on its current account deficit. A reduction in its terms of trade through lower energy prices will only complicate the transition process as the currency adjusts.

7. The American "mulligan"

The ability of the U.S. to come back from the depths of the financial crisis equates to a "mulligan" on the golf course, according to Joseph P. Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management. The election, as he sees it, offers an important chance not to steer back into the abyss, with Congress tasked with the important steps of capitalizing on American momentum earned in some part through the weakness of the rest of the world:

High on the policy list that would drive future growth in the U.S. and maintain America's competitive edge are the following: (1) immigration reform; (2) free trade agreements with Europe and a cohort of Pacific nations; (3) an end to the ban on U.S. energy exports; (4) a boost to the public sector on America's crumbling infrastructure; and (5) corporate tax reform.

The five policies just mentioned are just the tip of the iceberg when it comes to America's "to-do" list. Even with a new spring in its step, America's got plenty of heavy lifting ahead of it. That's why it is so important that America use its mulligan wisely. In our opinion, how the U.S. executes its "do-over" will be very important in determining future investment returns across multiple asset classes.

In the end, just as a crisis is a terrible thing to waste (a popular refrain six years ago), wasting or not fully exploiting a mulligan would be even more tragic.

8. A pox on everyone's house

A recent survey by brokerage ConvergEx said that despite any hopes for specific changes out of the election, Wall Street's mood remains sour on Washington. In a poll with a small sample and wide margin of error, 30 percent of respondents gave a failing grade to Obama, who garnered a mere 17 percent approval rating, and 27 percent said Congress flunked.

Other results saw respondents believing the biggest beneficiaries in the case of a Republican sweep as energy and financials. In a larger sense, though, they don't see the election being the market's biggest concern. That honor would go to the global economy (56 percent), followed by Islamic State terrorism (16 percent) followed by the midterms, at 13 percent.

Read MoreObama's approval rating on Wall Street: 17%

The overall picture insofar as politics goes, according to chief market strategist Nick Colas, is on the grim side:

In fact, the end of the Federal Reserve's bond buying program (last) week and Tuesday's midterm elections couldn't be more perfectly timed if it were a Hollywood script or a morality play from the Middle Ages. The U.S. central bank is essentially passing the baton back to Congress and the president after carrying it for the last six years. Wall Street is clearly rooting for a Republican Senate win. Could this be the beginning of a turn in sentiment, at least as far as Wall Street is concerned? Possibly, if only because it can't get much worse.