US Elections: Will Republican Gains Weaken Gridlock?

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The dual of filibuster and veto are obstacles as the GOP pursues its legislative agenda, argues Matthew Rubin (pictured), director of investment strategy at Neuberger Berman.

As expected, the Republican Party delivered on US election day, picking up at least seven Senate seats to regain control of the upper chamber of Congress, adding more than 10 seats to their majority in the House and winning several competitive gubernatorial races. Overall, it was a decisive win and one that is unlikely to be changed by potential run-off elections. That being said, Republicans will have to overcome the threat of the filibuster and President Barack Obama’s veto authority to move their legislative agenda forward.

Is This Time Different?
It is no secret that Congress and Washington have been perceived as ineffective in their core responsibility of governance. Despite the electorate’s frustration (President Obama and Congress have approval ratings of 42% and 14%, respectively), partisanship has ruled the day and prevented progress on a host of important issues. With the midterm elections in the rearview mirror, the focus will slowly shift to the budget and debt ceiling (which need to be addressed in early 2015), tax reform, immigration and foreign policy. Although it seems unlikely, we would be encouraged by a transition away from gridlock in the remaining two years of Obama’s presidency.

Market Implications
US equity markets initially responded positively to the Republican Party’s election wins. From a sector perspective, we believe the U.S. oil and gas industry, medical device companies and defense contractors stand to benefit from the GOP’s control of Congress while hospitals and HMOs may be negatively impacted by the targeted repeal of Affordable Care Act measures. With respect to the broader market, we see further upside potential for U.S. equities over a multi-year time horizon, for several reasons. Historically, U.S. equities have tended to respond favorably following midterm elections—the S&P 500 has not declined in the 12 months following a midterm election since 1946. More importantly, we believe that accommodative monetary policy, low inflation and a stronger dollar should continue to support economic expansion and earnings growth going forward.

A Look to 2016
In the aftermath of the midterm elections, we believe there are two clear takeaways: Obama was a drag on the Democratic Party and anti-incumbency fervor remains alive and well within the electorate. Although we acknowledge that 2016 is a long way off, we believe both of these trends will play a role in the next election cycle. Obama will not be running for public office in 2016, but the Democratic nominee (the current frontrunner is Hillary Clinton) will likely need distance from the previous administration unless public opinion begins to improve substantially. Should anti-incumbent sentiment persist, the GOP may be on the hot seat next time around as Senate ballots will feature 24 Republicans and 10 Democrats who are up for reelection in 2016. There is much work to be done in the meantime. However, we are comforted by our belief that the US economy remains on a steady path, regardless of how the political landscape shapes up in Washington.

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