Midterm Election Impact On Stock Market

NEW YORK — Next year will be a year unlike any other for the stock market.

The Republican takeover of the House of Representatives on Tuesday means Wall Street will be contending with three situations in 2011 that drive stock prices:

_ The year before a president faces re-election.

_ The year after a president has lost control of Congress.

_ The second year of a fragile economic expansion.

The market often behaves a certain way in each of those situations, but history isn't helpful now because investors have never faced this trifecta before. What's clear is that what happens in Washington will be watched even more closely by investors next year.

"This election is more important than the average one because of all of the economic and policy issues that remain uncertain," says Robert Doll, the chief investment strategist at BlackRock, an investing firm with $3.4 trillion in assets under management.

Any mishandling of the economy by politicians will mean that "the fragile economic recovery we have is going to be hit over the head, and we would have to think about a double-dip recession all over again," Doll says.

Here's a look at the three situations coinciding next year an dhow they coulf affect the stock market:

_THE YEAR BEFORE A PRESIDENT RUNS FOR ELECTION:

Since 1945, the Dow Jones industrial average has gained an average of 19 percent the year before a sitting president runs. That's more than double the 7.9 percent average annual gain during the same period. If you take out the 10 years when the president was running, the average gain drops to only 5.8 percent.

No one has been able to prove why this happens. One theory is that the president pushes through politically popular spending measures to help his re-election. But that doesn't explain why the market also tends to rise in the third year of a president's second term. The Dow rose 25.2 percent, for example, in 1999, the third year of President Clinton second term. Since 1902 the Dow has gained, on average, 13.7 percent in the third year of a president's first term and 10.9 percent in the third year of a president's second term.

_THE YEAR AFTER A PRESIDENT LOSES CONTROL OF CONGRESS

Presidents whose party controlled both houses of Congress have lost at least one chamber five times in the past 80 years. Stock returns in the following year haven't followed a pattern. The Dow plunged 53 percent in 1931 and gained 34 percent in 1995. Gains in the other three years ranged from 2.2 percent to 20.8 percent. That makes it impossible to forecast what will happen this time. The change in Congress in 1931 came during the Great Depression, while the 1995 transition came during the first part of the Internet boom. The next Congress faces a fragile economic period, which could mean that the market offers another single-digit gain like this year.

Gridlock hasn't been great for stocks. Since 1945, the Standard and Poor's 500 index has gained 4 percent in years when Congress was split between parties. It increased 8 percent when Congress was controlled by one party and the White House another. When a single party was in control of Washington, the index gained an average of 11 percent.

_SLOW-GROWING ECONOMY

The economy is growing at a 2 percent annual rate, according to the latest estimate by the Commerce Department. That's slow by historical standards and shows that the end of the recession 17 months ago hasn't translated into a robust economic expansion.

Stocks have been in a bull market for 18 months, pushing the Dow up 70 percent since it hit a 12-year low in March 2009. That gain is larger than normal but isn't surprising considering that the rally followed the worst financial crisis since the Great Depression. During slow recoveries like this one, bull markets typically last 30 months and bring gains of 44 percent overall, according to Ned Davis Research.

Corporate profits are improving, and wealthy consumers are starting to make some costly purchases. If the economy continues to improve, stocks will likely rise. But don't expect large gains because the economy needs to grow 3 percent or more to bring down the country's 9.6 percent unemployment rate. That's unlikely soon because residential and commercial construction remains weak, and construction fuels economic recoveries.

So what's an investor to do given this abnormal year? The best thing may be to follow your long-term plans regardless of what happens in Washington.

"There's no way to tell what's going to happen, or we would all be rich," says Paul Larson, the chief equities strategist at Morningstar.

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Vermont Governor Election: Legislature May Decide Race's Winner

MONTPELIER, Vt. — With a governor's race too close to call hours after the polls closed, Vermont lawmakers – not voters – could find themselves picking the winner.

With 89 percent of precincts reporting early Wednesday, Democrat Peter Shumlin had 49.4 percent of the vote compared to 47.9 percent for Republican Brian Dubie.

Under the Vermont Constitution, if no gubernatorial candidate receives 50 percent of the vote plus one vote, lawmakers vote by secret ballot when they convene their new session in January.

The close race is all too familiar for Shumlin. He led in balloting in Vermont's five-way Democratic gubernatorial primary but wasn't declared the winner until after a recount.

If vote totals end up within 2 percentage points of each other, a recount could be requested.

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Florida Election Results 2010: Rick Scott Leads Alex Sink

FORT LAUDERDALE, Fla. — Republican Rick Scott clung to a razor-thin lead early Wednesday over Democrat Alex Sink, saying he was "absolutely confident" he'd prevail. Sink vowed not to give up until "all the people of Florida have their voices heard."

With 99 percent of the expected vote from Tuesday's election counted, Scott had 49 percent while Sink had 48 percent.

"I am absolutely confident I will be the next great governor of the State of Florida," Scott told a crowd of hundreds of giddy but exhausted voters in Fort Lauderdale just after 2 a.m. "We look forward to finishing the count. We know we're going to win."

Still, the race remained too close to call, with just tens of thousands of votes separating the candidates out of more than 5 million cast. Sink's party ended with the Democrat telling supporters "We are coming down to the wire in what looks to be a dead-even race."

Sink was pinning her hopes on still-uncounted votes in Palm Beach, Broward, Miami-Dade and Hillsborough counties. It remained unclear how many ballots were outstanding. To trigger an automatic machine recount, Sink would need to cut Scott's lead to 0.5 percent or less.

Voters on both sides of the aisle were hopeful their pick would prevail after a fiercely contentious, incredibly expensive race.

Scott, 57, is a multimillionaire who unexpectedly jumped into the Republican primary race in April. With an antiestablishment message and tea party backing, the political newcomer proceeded to spend about $73 million of his family's money beating Attorney General Bill McCollum for the GOP nomination and then taking on Sink.

After the August primary, he quickly picked up the backing of state GOP leaders, many of whom had worked to defeat him, and began to paint Sink as a "Tallahassee insider" who marches in lockstep with President Barack Obama.

Scott's albatross in the campaign has been his leadership of Columbia/HCA, a hospital conglomerate that ended up paying $1.7 billion in fines to settle federal charges of Medicaid and Medicare fraud.

Scott, who founded the company and built it into the largest for-profit hospital chain in the world, said he didn't know anything about criminal activity and was never charged, but now assumes responsibility for what happened on his watch. He wanted to fight the charges, but was forced out by his board in 1997.

Sink, 62, worked for 26 years in the banking business, eventually becoming one of the state's most prominent businesswomen. As Florida president of NationsBank – which later became Bank of America – she oversaw 9,000 employees, 800 branch banks throughout the state and $40 billion in customer deposits.

After parting ways with the bank in 2000, Sink stepped up to take a high-profile role in the failed gubernatorial campaign of her husband when he opposed Jeb Bush in 2002.

Then, positioning herself as an outsider, she won the job of Florida's chief financial officer in 2006 in her first ever election. The CFO is the Cabinet officer who not only pays the state's bills but has such other varied duties as regulating funeral homes, overseeing the fire marshal's office and investigating insurance fraud.

The winner will replace Charlie Crist on Jan. 4. He ran for the U.S. Senate instead of seeking a second term. Crist lost the race to Marco Rubio Tuesday.

__

Stacy reported from Tampa, Fla.

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Midterm election 2010: An Inside Look At the group off spending surge energize the image group

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WASHINGTON — A year ago, two top Republican strategists sat down for lunch at the venerable Mayflower Hotel, five blocks from the White House, calculating how to exploit the voter anger they had seen erupt at Democratic town hall meetings that summer.

Today, the money-raising success of the GOP-allied attack led by the U.S. Chamber of Commerce and the Karl Rove-inspired American Crossroads has stunned opponents and even its own architects. It's one big slice of the estimated $3.5 billion expected to be spent on this year's campaigning, a record for a midterm election.

Financed to a great degree by undisclosed donors – and helped by a new Supreme Court ruling – the deep-pocketed groups have become a dominant part of this election's narrative. They have reversed past pre-eminence by Democratic outside groups. And they have become a prototype for elections to come.

Their effort has been a major factor in the $264 million in spending so far in this election by outside groups – organizations separate from the political parties and candidates.

Rove, who was President George W. Bush's top political adviser, and the two Mayflower lunch partners – former GOP Chairman Ed Gillespie and Steven Law, a veteran of Capitol Hill and the Chamber of Commerce – worried that the Republican Party alone would be no match for President Barack Obama's superb fundraising.

"Clearly there was a tremendous amount of grass-roots energy building – a grass-roots prairie fire that was building in intensity," Law, now the Crossroads president, said in an interview. "We felt that one of the things we could do was pour gasoline on that."

If voters seemed angry, so was corporate America. Obama led Congress into passing health care and financial regulation overhauls and pushed for climate legislation, all of which angered the business community.

In the end, the advantage held by the GOP outside groups helped neutralize the financial edge enjoyed by the Democratic Party over the Republican Party. Together, they all have contributed to an explosion of concentrated political advertising – perhaps $1 billion worth – that rivals the annual ad spending on cereal by Kellogg's or on drugs by Viagra maker Pfizer Inc.

In the past few days, Democratic-leaning groups led by labor have begun to weigh in with their own money, anxious to match the GOP effort on the ground and on the air. Aided by more than $4 million from America's Families First Action Fund, a group gathering large donations to support House candidates, Democratic allies have managed to stay virtually even with Republican groups during the past six days, according to an Associated Press analysis of Federal Election Commission data.

The GOP plan Rove, Gillespie and Law designed was ambitious. It would require the various Republican constituencies to unite behind one economic message. The conservative movement's biggest donors would have to pony up for a midterm election with sums that would have to match or exceed their giving during presidential elections. And the groups would have to align their spending, selecting their targets and becoming almost a parallel Republican Party.

This election has emphasized the use of nonprofit, tax-exempt organizations in politics – a trend that is not new but has gained attention by the sheer size of the spending. The groups are not required to disclose their donors, adding an element of secrecy that Obama and Democrats have denounced.

The $264 million in outside group spending reported to the Federal Election Commission as of Tuesday already exceeds outside spending in the 2008 presidential year and is four times the outside spending seen for the 2006 midterms.

"It's a telltale sign that things have really shifted in a dramatic way this cycle," said Sheila Krumholz, executive director of the Center for Responsive Politics, which tracks campaign money.

Moreover, actual spending could be far higher because the reports cover only spending on communications. There is no accounting for get-out-the vote field operations by conservative and liberal groups.

The money comes amid a new landscape in campaign finance created when the Supreme Court, in a case known as Citizens United v. Federal Election Commission earlier this year, opened the way for corporations and unions to spend money in elections. While that ruling and other court decisions have created a more freewheeling environment, the lack of disclosure makes it difficult to determine whether corporations have stepped up their giving.

What's more, the special Massachusetts Senate election this year, won by Republican Scott Brown, preceded the Citizens United decision and still attracted more than $5 million in spending by more than a dozen outside groups.

The U.S. Chamber of Commerce relies on undisclosed corporate contributions and has seen its fundraising grow. Chamber President Thomas Donohue has aimed for a record goal of $75 million in political spending at the federal and state levels this election season.

Bruce Josten, top lobbyist for the U.S. Chamber, said the business group saw Democratic-allied groups in 2008 pour vast sums of money into TV advertisements and achieve historic successes and decided to "take a page out of their book, learn a lesson."

"We've been able to do what we've done because people are angry," Josten said.

Money alone does not decide political contests. In 1994, the Democratic fundraising advantage could not stop a Republican tidal wave that switched control of Congress.

But it is one significant barometer of partisan fervor.

"Money does follow momentum," Josten said. "You saw that in '08, and you're seeing it now."

Republican-leaning groups have far outpaced liberal and Democratic-leaning organizations. American Crossroads and its affiliate, Crossroads Grassroots Policy Strategies, surpassed their $65 million fundraising goal on Monday and together have spent $30 million on 14 Senate and 18 House races. The Chamber of Commerce has spent $34 million in 58 races. The American Action Network, which occupies the same 12th floor office space in a Washington office building with American Crossroads, has spent $22.7 million.

With days to go, Democratic-allied groups are weighing in, too. They are relying primarily on labor unions that are spending directly in some battleground races or financing smaller versions of the GOP-allied model.

The National Education Association, through its advocacy fund, has pumped $2.4 million into four Senate races just in the past three days, including $1 million for ads opposing Republican Senate candidate Dino Rossi in Washington state. But labor's effort is diffuse. One of the biggest union spenders – the American Federation of State, County and Municipal Employees – has spent $90 million so far in this election, according to the union's political director, Larry Scanlon. But that money includes millions that it is spending on gubernatorial and state legislative races. Its direct spending on congressional contests as of Tuesday totaled $11.8 million.

Unions also are less likely to use television advertising to deliver their message, focusing instead on mailings and door-to-door canvassing.

In addition, the millionaire contributors that helped finance Democratic outside groups in the past have largely stayed away from politics this election, and the unions, their ranks diminished by the recession, have less money to spend. Donors like billionaire George Soros have put their money into policy causes such as health care and climate change. Last week, Soros gave $1 million to the liberal Media Matters for America, a group that routinely targets Fox News. On Tuesday, he contributed $1 million in support of a California referendum to legalize the recreational use of marijuana.

Big corporate and labor money is not unusual in politics. Unions and companies used to give directly to the parties in unlimited amounts. That money was disclosed and had restricted uses. But Congress in 2002, banned such "soft money" contributions to the parties.

It didn't mean the source of the money went away from politics.

___

Associated Press writer Julie Hirschfeld Davis contributed to this report.

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