How Us Interim Terms Could Ripple The Stock Market

NEW YORK (Reuters) – Investors are turning their attention to Tuesday’s U.S. midterm elections, which will determine control of Congress and could spur moves in everything from energy companies to cannabis stocks. Republicans have picked up steam in polls and betting markets, and analysts see a divided government — with the GOP winning the House and possibly the Senate — as the likely outcome, possibly hampering Democratic President Joe Biden’s agenda. Traders also appear to be leaning toward a Republican victory: a basket of stocks and other assets tracked by the Strategas consultancy that are expected to do well after a Republican victory have outperformed the Democratic bond portfolio, indicating about 70% chance Republicans will win both the House and Senate. A divided government could lead to political gridlock that prevents major policy changes, an outcome that investors see as favorable for stocks. Regardless of the winner, the previous midterm elections ushered in a period of positive market performance, which investors would welcome after a year in which the S&P 500 fell nearly 21%. But the divided administration could also open the way for partisan squabbles over raising the federal debt limit that could lead to worries about a US default. Here are some areas of the stock market that will be in focus as Americans head to the polls: DEFENSE Defense spending is expected to rise regardless of how Tuesday’s vote goes, given geopolitical tensions such as the conflict in Ukraine. But a Republican sweep sets the stage for spending to increase “significantly,” according to UBS Global Wealth Management, versus “moderately” if Democrats retain one or both houses of Congress. The result focuses on stocks of defense contractors such as Lockheed Martin or Raytheon Technologies. The S&P 500 aerospace and defense index is up nearly 10% this year. ENERGY The story continues Energy stocks have rallied, with the S&P 500 energy sector up more than 60% so far in 2022, while the broader index is down about 21%. Policies to encourage more U.S. energy production could result from Republican control of both the House and Senate, Citi analysts said. While such legislation could be favorable to oil exploration companies, it could weigh on stocks by depressing oil prices, Citi analysts wrote. More immediate benefits from favorable industry regulations could trickle down to shares of pipeline companies such as Williams Cos., Strategas said. CLEAN ENERGY With Republicans gaining momentum, any downside for solar and other alternative energy stocks may already be building, but a surprise Democratic victory could boost the sector. The Invesco Solar ETF is down about 6% this year. Legislation favoring “clean energy,” including tax credits and investment, could gain support if Democrats retain control of Congress, according to State Street Global Advisors. HEALTH CARE Pharmaceutical and biotech stocks may benefit from a Republican victory after Democrats recently passed a law aimed at lowering prescription drug prices. Pharmaceutical and biotech stocks as a whole moved in the opposite direction of betting odds favoring a Democratic sweep, according to analysts at Goldman Sachs. The S&P 500 healthcare sector is down about 7% in 2022, while the S&P 500 pharmaceuticals index is down about 1%. SECURITY A Republican Congress would make border security “a top issue,” according to Strategas. While private prisons like CoreCivic and Geo Group face “a steady stream of negative headlines” during the Biden administration, “remaining federal policy risks will be largely eliminated in a divided government scenario,” BTIG said in a report. her. CoreCivic is up about 12% this year, while Geo Group is up about 15%. CANNABIS Cannabis stocks like Canopy Growth tend to move on regulatory headlines, including the prospect of legalization efforts. Chances for more cannabis-friendly legislation increase with a Democratic majority, according to Strategas. The AdvisorShares Pure US Cannabis ETF is down more than 55% this year. GREAT TECHNIQUE It’s unclear whether reforming the megacap tech company has bipartisan support, according to Citi analysts. Therefore, a Republican victory in the House or Senate “probably means a legislative deadlock, indicating an incremental positive for the category,” he said. The tech-heavy Nasdaq 100 has fallen by about a third this year. (Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili)