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Valliere: GOP Election Landslide Will Bring Tax-Cut Deal

Alexandra Grablewski | Riser | Getty Images

Veteran political handicappers are now openly using the phrase “tidal wave” to describe the Nov. 2 House and Senate elections.

With the economymired in a 1.5-percent-GDP growth path and the public convinced that government stimulus hasn’t worked, a potentially historic landslide looms.

There’s a high probability that Republicans will re-capture the House. The magic number is 39, and some handicappers like Charlie Cook think the GOP could pick up far more than that—perhaps rivaling the 54 seats that Newt Gingrich and the Republicans captured in 1994.

Suddenly, the Senate is in play as well. The magic number there is 10, which seems difficult to attain because the Democrats now have a chance to win the Joe Biden seat in Delaware, which looked lost before the stunning primary win by the Tea Party's Christine O’Donnell.

But other Senate races, thought to be beyond the reach of Republicans, now look competitive. Cook and other handicappers have shifted Connecticut from “leaning Democrat” to “tossup” as wrestling executive Linda McMahon (R) moves within a few points of Attorney General Richard Blumenthal (D).

Among the other races to watch, Wisconsin Democrat Russ Feingold suddenly looks vulnerable.

The voter anger is palpable. If a deeply flawed lightweight like O’Donnell can defeat a personable, well-funded establishment candidate like Mike Castle, there’s a mighty wind howling. Maybe that wind won’t help the Republicans everywhere, but it’s toxic for the Democrats.

The bottom line is clear: This election is likely to radically alter the dynamics in Washington and on Wall Street. The activist Obama agenda will grind to a halt in 2011-2012, replaced by gridlock—and gridlock almost always is a positive for financial markets.

But it would be a mistake, in my opinion, for investors to conclude that the stock marketwill be a screaming buy on Wednesday morning, Nov. 3—even if Republicans take both houses. Why? For starters, Obama will have his veto power for two more years. Moreover, regulatory agencies such as the Environmental Protection Agency will maintain an activist posture.

Perhaps most important, the markets will not get a clear road map on taxes until December. That’s because politicians in both parties won’t act until a lame-duck session, preferring to roll out their best sound bites on taxes between now and the election—the GOP will assert that this is a terrible time to raise taxes on anybody, while the Democrats will rant against “tax cuts for the rich.”

We believe that an eventual deal will be cut in the lame-duck session, extending the Bush tax cuts—for everyone—for another two years. But that’s far from certain, so the markets thus will have to wait another three months to get some predictability on that issue.

But it seems very likely that many investors will breathe a sigh of relief after Nov. 2. The election landslide probably will be viewed as a referendum on the populist, confrontational Obama administration, and it seems likely that the president will have to move toward the center if he wants to have any chance of re-election.

In fact, we think that within hours of the Nov. 2 voting, the political focus will shift to the 2012 election. Obama’s opponents will be able to block virtually everything in the next two years—cap and trade, card check for union organizing, immigration amnesty, etc.

But can his initiatives actually be reversed? The Electoral College map looks so dismal for Obama in 2012 that a genuine push-back by conservatives in two years may soon look achievable.

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Greg Valliere is Chief Political Strategist at the Potomac Research Group, a Washington-based firm that advises institutional investors on how government policies affect the markets. Greg has covered Washington for over 30 years, starting his career as an intern at The Washington Post, then co-founding The Washington Forum in 1974 to bridge Wall Street and Washington. He has held several positions, including Director of Research, for Washington-based firms, including the Schwab Washington Research Group. Greg is an exclusive commentator for CNBC-TV, where he appears regularly on most of the network’s programs.