November 2, 2010

After Vote, GOP Expected to Win House; Fed to Announce QE Plan

Republican control of the House will create gridlock, but analysts say that will be good for the markets

Republicans are expected to gain control of the House but not the Senate. Republicans are expected to gain control of the House but not the Senate.

Election day has finally arrived and while the true make-up of the next Congress won’t be revealed until Wednesday, Republicans are optimistic they will win the 39 seats that will guarantee a takeover of the House. Republicans gaining control of the Senate, however, looks far less likely.

What can be expected with a Republican-controlled House is two years of legislative gridlock. But Doug Roberts, chief investment strategist for Channel Capital Research, says gridlock will be positive for the markets because “the fear of regulation is going to recede,” and therefore the markets will “see no threats,” particularly when it comes to the health care sector. While it’s unlikely Republicans will be able to repeal healthcare reform, they will do their best to “defund” certain parts of the new law, Roberts says.

On the Senate side, Majority Leader Harry Reid, D-Nev., faces a very tough re-election on Tuesday as investors there worry about the poor condition of the state's economy. Jeff Kleintop (left), chief market strategist for LPL Financial, says the economy in the Southwestern states remains weaker than in other parts of the country. Nevada, Kleintop notes, “has not yet emerged from recession.”

On the heels of the election will be the meeting of the Federal Reserve Board on Wednesday and then the release of employment numbers for October on Friday. On Wednesday, the Fed is expected to initiate a new round of quantitative easing by purchasing $500 billion of long-term securities to boost the economy. President Barack Obama is “going to attempt to stimulate the economy by using monetary policy, and there’s very little that the Congress can do to stop it,” Roberts says.

The U.S. Fed’s use of quantitative easing will likely result in the same outcome as Japan had during its nearly two years of quantitative easing, Roberts says: it will “benefit the [U.S.] economy in the intermediate term,” but won’t have a long-term effect. Quantitative easing, he opines, will have a positive effect on the markets. “All that liquidity is going to elevate certain asset classes. We [can’t] be sure whether it’s going to be stocks as much as gold or bonds.”

LPL's Kleintop notes that the Labor Department’s employment report on Friday is expected to say that 70,000 to 80,000 private sector jobs were created in October. Those numbers show growth, he says, but “it’s not good enough to bring the unemployment rate down, which is at 9.6%.” Well over 100,000 jobs per month need to be created, Kleintop says, to bring the unemployment rate down, which will help investors regain confidence in the market.

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