Philadelphia, Pennsylvania – (StockNewsDesk) – 11/03/2014 — After a steep decline in the first two weeks of October with the S&P 500 falling nearly 10% from peak to trough, the major averages have furiously rallied back to new all-time highs . This has come about despite some of the catalysts for the correction, such as fears about the weakness in the global economy, the Fed’s marginal tightening of monetary policy, Ebola panic, and the conflict with ISIS, not really being resolved at all.
Republican Wave Boosting Stocks
One of the main catalysts for the market’s surge, despite the gloomy news, has been the growing strength in polls for Republican candidates. Earlier this year, a strong Republican year was expected; however, the potential size of the victory is eclipsing the hopes of even the biggest optimists.One of the reasons pundits expected Republicans to outperform was that many Democratic senators were elected in 2008 with the tailwind of President Obama’s popularity. This tailwind has become a powerful headwind as Obama’s approval ratings have slipped to historical lows, and these same senators are now up for reelection. Further, Republican voters tend to be older and are more likely to vote in midterm elections, compared to the younger, Democratic voters who only vote in presidential elections.
Gridlock in DC
It now seems likely that Republicans will take control of the Senate and add to their total in the House of Representatives, giving Washington DC a true gridlock for the next two years. Statistical analysts rate this possibility at a 65 – 85% chance, based on polling data, and it continues to inch higher, day by day.
Historically, stocks perform their best under this specific arrangement – an executive branch headed by a Democrat, and a legislative branch headed by Republicans. Gridlock basically ties the hands of both parties, forcing them to shelve the most ambitious parts of their agenda. It compels them to work together; often good things come out of such compromises, and not partisan driven agendas.
Further, Republicans are expected to roll back some of the most ambitious parts of Obama’s agenda, in health-care policy and environmental regulation. President Obama ignored these criticisms from Republicans while Democrats kept control of the Senate, since Republicans would not be able to pass any real legislation. Now, he will be forced to address their concerns via his veto pen or through negotiations.
Coal Stocks Are Biggest Beneficiaries
Republicans aggressively campaigned on the new stringent environmental regulations, and the new Senate Majority Leader, Mitch McConnell has made protecting the coal industry a centerpiece of his campaign. Thus, in the last two weeks, with Republican control becoming a certainty, coal stocks have been one of the biggest gainers in the market.
Due to new environmental regulations that have prompted many coal-fired plants to switch to natural gas, coal demand is decreasing and many coal producers have filed for bankruptcy, while others are perilously close. Many coal stocks’ prices are down over 90% since 2008, and 75% since 2011, when many of the regulations went into effect. In the past two weeks with a Republican takeover looking imminent, some of these stocks were up close to75%. The same phenomenon was witnessed in the lead-up to the 2012 election, when any surge in the polls for Mitt Romney led to massive gains in coal stocks.
Overall, the Republican takeover of the Senate is the primary reason behind the market’s climb higher in recent days. Certain areas of the market could see weakness, such as alternative energy stocks and healthcare IT stocks, which have benefited from the implementation of Obamacare. While others, such as energy and medical device companies, could continue moving higher, as Republicans repeal regulations on emissions and drilling and Obamacare taxes on medical device companies.