NEW YORK (CNNMoney.com) -- With strong earnings, lower oil prices and a slowing economy to focus on, stock investors haven't exactly been paying attention to Tuesday's congressional elections. But maybe they should be.
Various reports indicate the Republicans are in danger of losing 20 to 35 seats - and their majority - in the House. In the Senate, the GOP is expected to lose at least four seats, in which case they would still be in control, or as many as six, which would swing the Senate to the Democrats.
Either scenario would mean the president and the Congress will no longer be controlled by the same party, aka gridlock. And for stocks, that's a mixed bag.
In the short term, a change in control of at least one of the chambers of Congress would probably spark a stock selloff, investors and market experts said. That's because traditionally Republican Wall Street would seem to prefer to have Republicans in control of Capitol Hill as well as the White House since the party's policies are widely viewed as more big business friendly.
Should the Republicans hold on to both chambers of Congress, "we can anticipate an upward - though likely short-lived - trend" in the market, said David Leblang, a political science professor at the University of Colorado, Boulder.
But in the long term, having either party in full control is not necessarily a good thing. In fact, in the long term, "the market actually likes the executive and legislative branches under different leadership as it reduces any damage coming out of Washington," said John Davidson, president of money manager PartnerRe Asset Management.
That was certainly the case in the 1990s when the pairing of Democrat Bill Clinton in the White House and a Republican-controlled Congress coincided with the longest economic expansion in the history of the United States - the famed tech-driven 90's boom.
A recent Ned Davis Research study suggests the market could weaken between the elections and the end of the year, if the last 104 years are any guide.
That's because 2006 is a mid-term year for a second-term president. In such years, a change in one or both houses of Congress has usually coincided with the Dow gaining in the months leading up to the election, and then sputtering or sliding through the end of the year.
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[S&P's Sam Stovall offers a slightly different viewpoint.]
The mid-term elections are upon us. Control of the Senate and House of Representatives is up for grabs. Even though the Democrats may take control of the House, the odds are long for a total sweep. But as Harry Truman proved in 1948, anything is possible.
Currently, the Republicans control both the executive and legislative branches of the U.S. government. So the obvious question is: What happened to stock prices when one party surrendered partial or total control of Congress? This scenario has occurred six times since 1945 — twice to Democratic presidents and four times to Republican chief executives. Interestingly, Wall Street responded favorably to the change, with the S&P 500 posting an average price advance of 4.8% during November and December of those years (five of the six times, the S&P 500 had a gain for the year). Remember, however, that what worked in the past may not work again in the future.
So, what can investors expect in 2007?
Next year marks the third year of President Bush's second term in office. Historically, stock prices have posted their best performances in the third year of the presidential cycle, rising an average of 18% since 1945 vs. an average of 9% for all four years. What's more, third-year advances have been very consistent, as the S&P 500 climbed 93% of the time (the market was flat in 1947). The last time the "500" declined in the third year was 1939. The fourth year's 8.6% average increase is second highest.
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[11/8/06 Tomorrow's News Today] The U.S. stock market had a solid rally in October and now the major indices might be due for a pause, some technical analysts say.
Merger and acquisition news and solid third-quarter earnings have pushed stocks sharply higher over the last few days.
On Tuesday, the Nasdaq Composite index finished at 2376, roughly three points below its recent five-and-a-half year closing high, hit on Oct. 26. The broad Standard & Poor’s 500 index ended at 1383, only six points lower than its six-year closing high.
Both indices are now looking a little overextended, based on weekly stochastics that measure of how overbought or oversold stocks are, said Katie Townshend, chief market technician at MKM Partners.
Their uptrend off their summertime lows is much too steep to appear sustainable, she said.
Already momentum is beginning to slow in sectors like utitities and real estate investment trusts, she said.
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