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. Last Updated: 07/27/2016

Wall Street Eyes Election Victory

NEW YORK -- While political candidates in the United States noisily bang the drum for last-minute votes, the stock market has had a rally of its own.

The way many investors see it, Wall Street can only win on Election Day.

In one scenario, the Republican Party gains total control of Congress in Tuesday's midterm election and moves on with a pro-business agenda.

The expectation of that outcome has helped power some of the recent advances in the stock market.

"It is a good piece of it,'' said Arthur Hogan, chief market analyst for Jefferies & Co. "Everyone is saying, 'That is great. They will take care of all of our business problems. We will worry about social issues later.'''

The other likely scenario: Voting reaffirms the status quo, with Republicans in control of the House and a Democrat-run Senate in a standoff that keeps any radical reforms from being passed.

"The markets, frankly, would probably be happiest if we continued in the state of deadlock with one party controlling one chamber and another party controlling the other,'' said Charles Crane, a strategist with Victory SBSF Capital Management.

The market believes that a Republican-controlled Congress would be a boon to most business sectors, especially tobacco, pharmaceuticals and defense. Companies and the wealthy also could expect more tax breaks.

While surprisingly strong earnings also played a role, a perceived improvement in Republican chances helped make October a winner for Wall Street.

The Dow Jones industrial average rose 10.6 percent last month, its best October since 1982, when it gained 10.7 percent and its best month since January 1987, when it climbed 13.8 percent.

Meanwhile last month, the Nasdaq composite index rose 13.5 percent and the Standard & Poor's 500 index advanced 8.7 percent.

While the entire market has been enjoying a nice ride, the fact that some companies' stocks have done well, despite negative earnings reports, indicates that expectations of a Republican victory could be at play.

Drug maker Wyeth, for example rose 6 percent in October, despite reporting that its profits missed forecasts by 5 cents a share.

While many factors can contribute to changes in any single stock, a Republican congress is considered less likely to pass price control legislation or other reforms that could affect drugmakers' profits.

With razor-thin margins in pre-election polls in several states, Republicans are hardly assured of the key gains they hope to make Tuesday.

If Democrats hold their own, Wall Street will still be happy.

"The market, and the people, like balance,'' said Dan Ascani, editor of a newsletter called "Profits Without Borders.''

For example, this year Congress was unable to pass stricter punishments for corporate accounting malfeasance -- despite all the calls for reform in the wake of scandals involving such companies as Enron and WorldCom.

The Democrat-controlled Senate and Republican-controlled House were not able to agree on details of the legislation.

According to Jeff Hirsch, publisher of the Stock Trader's Almanac, stocks have rallied after previous midterm elections in which the president's party either wins control of the House or loses no more than 8 percent of its seats.

The Almanac doesn't track the Senate, because the House election is bigger and thus a better gauge of American political sentiment, according to Hirsch.

In those cases, the Dow has gained an average 6.2 percent through the end of the year.

In all other instances, the index has dropped an average 1 percent.

Perhaps the worst scenario: An election remains clouded in doubt. As investors learned in 2000, when a nearly dead-even presidential race stumped the nation for weeks, the market wavered.

"The big risk for the market is that we might not have a result [for the Senate], and that this uncertainty lingers until December,'' said Chuck Gabriel, senior Washington analyst for Prudential Securities.