Valliere: Seven Major Post-Election Themes

Barring a major surprise, the Republicans will take the House on Tuesday night – our prediction is a gain of 55 net seats, far more than the 39-seat magic number – while falling just short of the 10 seats needed to take the Senate.

This likely outcome is fully priced into the markets, so perhaps it’s not premature to look at the seven biggest themes that are likely to dominate the post-election analyses.

Theme One: The New Austerity will become even more dominant. It’s already a huge story in states such as Chris Christie’s New Jersey, and it’s what the voters want. Of course, this is the worst time imaginable for austerity; the economy needs more stimulus, not less.

But there’s a new sheriff in town – Rep. Paul Ryan (R-Wis.), the conservative intellectual who will become the new House Budget Committee Chairman. Ryan knows the GOP can’t overturn any of President Obama’s new laws; Obama’s veto will be good. But Ryan can “starve the beast,” and it’s quite likely that he will prevail over a de facto spending freeze for the next two years.

Jeffrey Coolidge | Iconica | Getty Images

Theme Two: Bipartisanship? You’ve got to be kidding. The far right and the far left will become even more powerful. The Tea Party will have a virtual veto over the GOP leaders, Rep. John Boehner and Sen. Mitch McConnell. And the left will become more dominant within the Democratic Party, because the moderate Blue Dogs will get decimated on Tuesday night.

We’ll hear plenty of saccharine pledges on Tuesday night from winning candidates who want to get things done, work together, etc. Puh-leeze. The 2012 campaign will start on Tuesday night and trust us – neither party will really want to work together.

Theme Three: The election isn’t the most important story for investors. The biggest story for the markets between now and year-end is what happens to the Bush tax cuts. We’ve been telling anyone who will listen that the tax cuts will get extended for everyone in the lame duck session, and that still is the safest bet.

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

Tuesday’s election results will make it even more likely that the tax cuts will get extended for everyone, because the voters want it (and surviving Democrats will begin to worry immediately about 2012). The White House already is floating a trial balloon about a tax cut compromise – an indefinite extension for the middle class and a two year extension for the wealthy. This deal will get cut, and it’s potentially a huge plus for the markets.

Theme Four: Where does Obama go? Will he pivot adroitly to the center, as Bill Clinton did in 1994 after the Newt Gingrich landslide? That’s unlikely – Clinton had centrist instincts to begin with; Obama does not.

Fearless forecast – if Obama doesn’t show that he got the message, if he doesn’t move toward the center, there will be a growing consensus that he’s a one-term president. And that may prompt a challenge to his re-nomination within his own party.

Theme Five: The rise of the regulators. If you think the Obama activism will end, think again. The regulatory agencies will still be a major irritant for the markets – Elizabeth Warren will continue to annoy the financial services industry; the Environmental Protection Agency will attempt to regulate carbon; and the activist head of Medicare will worry health care providers.

"The 2012 campaign will start on Tuesday night and trust us – neither party will really want to work together." -Potomac Research Group, Greg Valliere

Theme Six: Is gridlock really good? We fully appreciate that the financial markets love gridlock, and why not — there’s no chance Congress will agree in the next two years to cap and trade legislation, the card check bill, or harsh protectionist measures. But would you like immigration reform, or a bill to clean up the mess at Freddie and Fannie, or a serious effort to curb entitlements? Fuhgeddaboudit.

Theme Seven: New leaders in both houses. We think Nancy Pelosi will step down as House Speaker within days of the election. Her likely replacement will be Steny Hoyer, the colorless veteran from Maryland who is surprisingly moderate and pro-business – and a personal friend of the likely House Speaker, John Boehner. These two will have to grapple with more radical elements in their own parties, but the bitter Pelosi-era acrimony may ease.

Harry Reid is now trailing in Nevada, and if he should depart, the new Senate leader will be Chuck Schumer of New York, the tireless, tough-talking camera hog. Schumer will give the Democrats a pulse rate, especially compared to Reid.

These seven themes are a very big deal. The pendulum is shifting dramatically to a less threatening, less activist climate – and that should be a generally positive change for the markets.

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.