Whats going to happen to the Dow if the Dems get a majority?

[Rich]

Seriously, what is the trend that the market takes if the Democrates take over the house or the senate? What happens if they sweep the governors races and state houses and senates?

What is everyone doing now, buying, selling or holding tight?

Personally, I don't have any idea on what to do with my Google stock.

Rich

[aiki14]

This is the WSJ's take and I agree. I think if there is a major surprise (Dems take both or Reps hold both) you might see a rally (reps hold) or a sell off (dems take), that was Merrill Lynch's take as well.



Politics Gone Mild for Investors
The Prospect of Shift in Congress
Doesn't Carry Much of a Threat;
Popular Theory: 'Gridlock Is Good'
By CHRISTOPHER CONKEY
November 6, 2006; Page C1
WASHINGTON -- The prospect of big losses for business-friendly Republicans in tomorrow's midterm elections is eliciting more shrugs than fears on Wall Street.

At first blush, this seems strange. A Democratic triumph that included winning one or both houses of Congress could undermine Republican economic policies such as tax cuts and deregulation that Wall Street tends to favor.

Amid the drumbeat of scandals and discouraging news from Iraq, futures traders in the Iowa Electronic Markets have raised the likelihood that Republicans will lose control of the House of Representatives to nearly 80% from 40% six months ago. The Iowa markets indicate that the Republicans ought to hold the Senate. That, plus a Republican president, may be one reason investors have taken a sanguine approach to the election.

As the Iowa markets have spent the past half year increasing their bet on a Democratic house, the Dow Jones Industrial Average has surged to a nearly 9% gain, even after last week's losses. "The equity markets are sort of shrugging it off," said Smith Granade, an associate economist who tracks election markets for Moody's economy.com. "We think they'll continue to do so, although there will probably be a little dip if Democrats actually win the House."

The first and most frequently cited rationale for Wall Street's nonchalance at the specter of a Democratic triumph is the old "gridlock is good" maxim. In other words, Democratic control of at least one chamber of Congress would mean divided government, making it less likely adverse legislation or excessive spending would pass.

This theory has holes, but it still carries great weight among many economists and investors. In the most recent WSJ.com survey of economists, 37% said the economy would perform best if Democrats win control of the House, versus 34% who said it would if Republicans maintain their grip. The most frequently cited reason was the potential for fiscal restraint at a time when the U.S. government is running large deficits.

William Niskanen, a former member of President Ronald Reagan's Council of Economic Advisers who now serves as chairman of the libertarian-leaning Cato Institute, said federal spending in the U.S. since 1949, after adjusting for inflation and population growth, has been roughly three times as low during periods of divided government as when one party runs the show.

That suggests gridlock could lift bond prices, as less government debt would tend to curtail the supply of bonds, but it might not help stocks. A recent study published in the Financial Analysts Journal that examined the monthly inflation-adjusted performance of 10 indexes found that stocks rose 6% per year during months of gridlock but soared 22% per year during months of one-party rule.

"The evidence doesn't back up the gridlock-is-good argument," said Tom Gallagher, senior managing director at ISI Group, a brokerage firm. It is more likely, Mr. Gallagher said, that investors seize on divided government as an easy outlet for their frustration with Washington. That enables them to return their focus to traditional drivers of stock prices like profits, economic growth and inflation. "People in the markets are inherently frustrated with politics. It's a way of dismissing politics and moving onto other things."

Another reason investors may be ignoring the potential reordering: history. Since 1946, the Standard & Poor's 500-stock index has almost always rallied in the fourth quarter following a midterm election. "I think it's just the markets wanting to get past the negative news flow of the campaigns and the uncertainty," said Jeffrey Kleintop, chief investment strategist at PNC Financial Services Group.

The two exceptions to this rule were in the fourth quarter of 1978, when inflation was jumping, and 1994, right after Republicans swept into control of Congress.

In the year after midterm elections, the S&P 500 has posted a whopping 23.1% average annual gain since 1946, according to Joseph Quinlan, chief market strategist at Bank of America Corp. By comparison, the S&P 500 has increased by an average of 7.8% in the year following a presidential election over the same period. Many economists said they expect the markets to be much more interested in 2008 when, as Mr. Kleintop said, "everything will be up for grabs."

The strong performance of stocks in the 12 months after midterm elections coincides with the third year of the presidential cycle. Many analysts said they expect a similar pattern this year, although gains may be muted given the tepid pace of economic growth. "We expect the markets to grind higher in the coming months, although robust gains are not likely given the effects of the U.S. housing recession on the U.S. economy and the fact that many indices are already priced for perfection," Mr. Quinlan wrote in a recent research note.


Futures markets aside, it is hard to predict the outcome of the midterm elections because it depends on the aggregate result of so many close races. Some observers just may not be convinced Democrats will gain the 15 seats they need to retake the House.

If Republicans pull off an upset and hold onto both houses, it could occasion a short-term bounce in stock markets. "Let's face it. The people that hold [equity] assets are Republicans, by and large," said Kurt Karl, chief U.S. economist at Swiss Re. "There might be some euphoria in the short term."

While stocks may be unscathed by Republican losses, many analysts caution that some could come under pressure. Drug stocks could suffer because Democratic leaders might push to have Medicare negotiate lower prices with pharmaceutical companies. Oil companies could face renewed calls for a "windfall profits" tax. Wal-Mart Stores Inc. could face pressure from efforts to boost unionization.