How Tuesday's election will impact the stock market — Watch the 'Republican portfolio' names

Published Tue, Nov 8 20229:03 AM ESTUpdated Tue, Nov 8 20227:15 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The fact that the midterm election will soon be over may be enough to spark a rally for stocks, but investors may also cheer the prospect of Washington gridlock as the best outcome for the market. Republicans look set to win back the House of Representatives in Tuesday's elections. The outcome in the Senate could also be a Republican majority, but that relies on a number of very close races. Either way, there will likely be no consensus between Congress and the White House. The potential results of gridlock "I think there will be things about gridlock the market likes. There will be things about gridlock the market doesn't like," said Ed Mills, Washington policy analyst at Raymond James. "As a whole, the most important outcome is getting it in the rearview mirror so we know what we're dealing with." Democrats currently control the White House and both houses of Congress. In the Senate, the two parties each have 50 seats, with Vice President Kamala Harris casting the tie-breaking vote. What the market would like about a Republican-controlled Congress is potentially less spending by the Biden administration on a new infrastructure plan and any taxes associated with it. But the market will not like a battle over the debt ceiling that could emerge next year if Democrats don't try to resolve it in the lame-duck session later this year. "The biggest negative for the market is headline risk, and the biggest headline risk is the debt ceiling," said Tom Block, Washington policy analyst at Fundstrat Global Advisors. "Raising the debt ceiling just allows the Treasury to pay the bills that have been accrued. We all know that at the end of the day we're going to pay our bills." The debt ceiling caps the amount of money the government can borrow, and it has been raised dozens of times, sometimes after a big fight. "If you are a Republican, you are scared to death of the debt ceiling. ... You know if you vote to increase the debt ceiling, it is going to be used against you," Block said. With respect to market sectors, strategists say that the traditional domestic energy sector may get a boost if the Republicans are in control of Congress. Further, health- care companies could benefit from GOP opposition to price controls. Meanwhile, defense and cybersecurity may benefit from more spending under Republicans. On Monday, clean energy names were hit while oil and gas shares rose. The iShares Global Clean Energy ETF slipped about 1%, and the Invesco Solar ETF was down 1.3%. The Energy Select Sector SPDR Fund, which tracks the oil and gas names in the S & P energy sector, was up 1.7%. Historically, stocks rise after midterms Mills of Raymond James said the market in general should get some relief from the sheer fact that the election is over. From Nov. 1 in a midterm election year to the following November, the S & P 500 has always gone higher. But according to CFRA Research, in those November-to-November years when the presidential party lost the majority in one or both houses, the gains were smaller. In general, history shows that the best returns on average have been when a Democratic president faced a divided