The market's desired election outcome, which would be the Republicans gaining control of the House at a minimum, has essentially been priced into stocks, but there are some lingering concerns about the next round of quantitative easing from the Fed. On both fronts, we won't know the final outcomes until next week, but investors can (and should) use the next few days to prepare for what may lie ahead for dividend stocks. Here are the answers to four pressing post-election questions.
QE2: What's enough to satisfy the market?
The last time the Fed set out on the failed quantitative easing voyage, it purchased $1.75 trillion worth of Treasuries. This was during the financial crisis and mercifully, we're in a different world today, but not different enough. It is doubtful that QE2 will be as large as its predecessor, but it is clear that any negative surprise on the QE2 front will be a near-term shock to equities. We wouldn't bet on QE2 going by the wayside and that means bond yields will be depressed even further, a scenario that will intensify the spotlight on high-quality, high-yielding dividend stocks.
Does a Republican Landslide “Green-light” Certain Sectors?
Maybe, but if you're thinking about the usual suspects such as financials and oil stocks, you may be disappointed in the near-term even if the GOP takes control of both houses of Congress. By now it's clear that big money center banks, in some cases, are a few quarters away from dividend restoration and it won't matter who is in charge of Congress. After all, the banks are still giving plenty of money to Democratic candidates.
As for integrated oil stocks, the group's earnings have been pretty solid and the dividends are dependable, though the yields for the U.S. firms aren't great, but a change in Congress doesn't mean the demand outlook will change and that's what the oil bulls need to see in 2011. Stick with MLPs and royalty trusts for the bulk of your energy dividend plays.
Gold: Increase or Decrease Exposure?
Regardless of the election's outcome, I would favor adding a little bit to your current gold exposure and for those investors not in the gold game, use the recent pullback in the yellow metal to get involved. Gold is in the midst of a decade's long rally that looks poised to stretch even longer. In those 10 years, we've had two presidents and one big shift in power in Congress, but there has been one constant: No one on Capitol Hill has defended the dollar and that has made gold rewarding, if not necessary.
One Race You Should Watch Regardless of Where You Live
It seems like a foregone conclusion that the Republicans will gain control of the House. Intrade puts the odds of that happening at 90%, but the Senate is a different story. Majority Leader Harry Reid (D-NV) could easily lose his race, but the Democrats could still keep control of the Senate. Stocks may react positively right off the bat to the prospect of no more Harry Reid, but he could easily be replaced by someone far more liberal, perhaps Chuck Schumer (D-N.Y.). Stocks would not react positively to that news.Disclosure: No positions