Tuesday's Election Results Point to Continued Stock Rally into 2015, History Says

11/06/2014 4:21 pm EST

Focus: ENERGY

Jim Jubak

Founder and Editor, JubakPicks.com

On the belief that the regulatory and economic environment would look brighter, Wall Street and the energy sector bet heavily on a Republican victory, and MoneyShow's Jim Jubak thinks Tuesday's results now set up a strong rally for the remainder of 2014.

However you feel personally about Tuesday's election—somewhere between joy and despair, I'd bet—the results do set up a strong rally for the remainder of 2014.

The historical data argue for a good fourth quarter. Quarter four in mid-term years has produced an average gain of 8% over the last 65 years, according to the Stock Trader's Almanac. Those fourth quarter gains have been followed by rallies of close to 8% on average in the next quarter as well.

Since 1945, the Standard & Poor's 500 (SPX) has climbed an average of 15% a year in years when a Democratic President has been opposed by a Republican-controlled Congress, according to Sam Stovall of Standard & Poor's. The average is almost identical in years when Republicans control both the executive and the legislative branches.

But this year, you don't have to rely on the historical record in order to believe in an end of the year rally that extends into the New Year. In this mid-term election, Wall Street and the energy industry bet heavily on a Republican victory and they've got to be feeling pretty good about the results.

For instance, according to the Center for Responsive Politics, 63% of contributions from employees and corporations in the financial sector went to Republicans this year. That's the highest percentage for Republican candidates in any mid-term election and the $78 million in contributions to Republicans is the largest figure in dollar terms ($78 million) for a mid-term cycle. The split in contributions from the energy sector was even more in favor of Republicans this year with almost 80% of the campaign cash going to Republicans in 2014, according to the Center for Responsive Politics.

That pattern of giving is totally explicable—these two sectors (gross generalization alert)—largely saw Democrats as the party of regulation, whether it was regulation targeted at reining in banks "too big to fail" or on such issues of importance to the energy sector as the XL pipeline, fracking, US crude oil exports, or—the bete noire—global warming.

And the expectation now is that the new Congress will employ a much lighter hand in these areas. Even before the votes were cast and counted, Republicans had been talking about forcing the Environmental Protection Agency to abandon its efforts to reduce carbon emissions and about rolling back parts of Dodd-Frank reforms and rules on consumer protection.

Of course, it remains to be seen how much of this hope for change—change does tend to sicken and die in Washington—turns into real legislation. But I suspect that the financial markets will leave such thoughts about reality for the cold days of February. Right now, optimism rules and Wall Street really, really believes that the regulatory, and hence, economic environment for the financial and energy sectors looks significantly brighter.

I'd count on that optimism to carry those sectors higher—even against sinking oil prices—for the remainder of 2014. And these sectors are big enough to carry the market with them if they do stage their own mid-term election rally.

A scheduling note: I'm off to the London MoneyShow today and my travel schedule—as well as the difference in time zones—is likely to play havoc with the timing of post until my return to New York on Tuesday, November 11.

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