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Now that the markets have largely digested the election results and the Fed’s FOMC meeting announcement, it was evident both outcomes were somewhat baked in as investors engaged in the typical front-running and anyone looking for a Black Swan Investment or binary trade on Wednesday was disappointed. The Fed unveiled plans to purchase of an additional $600 Billion in longer-term Treasuries by mid-2011 with the intent of lowering interest rates to further stimulate the economy and reduce borrowing costs for businesses and consumers (while leaving savers out to dry).

Meanwhile, pundits and futures markets like Intrade and others had widely predicted a strong Republican winning streak in both the House and the Senate, with Republicans gaining control of the House, but not the Senate. This outcome leads many to believe we may be looking at an era of gridlock in Washington, which is sometimes seen as a positive for stocks since it removes the specter of significant legislation and regulation as opposed to what we saw under a fully Democratic controlled Congress and presidency during the prior 2 years. There were no major surprises in the election outcomes in aggregate and markets opened Wednesday with a yawn and reacted more aggressively to the FOMC announcement in the afternoon, driving equities indices down initially followed by a rebound at the close.

Following the FOMC announcement at 2PM, the mix of purchases was further toward the shorter durations than the long end compared to what investors anticipated, so the 30-year Treasuries sold off violently on the announcement. In the after market news, an interesting tidbit out of South Korea indicated that they may be cutting off capital inflows (as reported by CNBC), worried about a world awash in US dollars with no end in sight. With overseas opportunities drying up if others follow suit, that could funnel even more momentum back into domestic equities and Treasuries – bubble or not. The ultimate timing play from here will be when to short treasuries.

Here are some ETFs that may continue to see strength due to continued dollar weakness and inflation fears given the latest round of Treasury purchases (with the door open for more to come in the future):

Weak Dollar and Inflation ETFs

GLD – SPDR Gold Trust – Gold would be expected to continue to do well in both a declining dollar and inflationary environment. These are somewhat related, yet different concepts, but with gold being utilized as an “independent” currency by many central banks and fearful individuals in the face of a declining currency and inflation anticipated years down the road, gold may very well continue its streak. There’s no reason to believe in the near term the US dollar will rally and investors will exit the “fear trade” of owning gold. Just ensure you’re familiar with gold tax requirements before buying any gold ETF or ETN to familiarize yourself with how various instruments are taxed.

SLV – iShares Silver Trust – Silver returns are pegged to gold, but are even more volatile. Year to date, SLV has more than doubled the return on gold, at 46% for SLV vs. 22% for GLD.

XLF – Financial Select Sector SPDR – Financials would be expected to be beneficiaries of continued quantitative easing. While most sectors dipped on the Fed announcement, XLF rose moderately. As the time horizon in which Financial services outfits can borrow cheap and lend out at a profitable spread continues to elongate, that adds more certainty and foresight to future earnings. While the latest foreclosure-gate scandal may be harmful to Bank of America (NYSE:BAC) especially, as well as others, that news was widely baked in before the announcement.

EEM – iShares MSCI Emerging Markets Index – Many view the Fed’s actions as currency manipulation, with the US exporting a weak currency and inflation around the world. While some countries are already seeing rampant inflation, let’s consider the broader context of what’s going on globally – faster growth emerging markets compared to western markets, a growing consumer class in emerging markets, and a race to the bottom in all currencies. The first two points are positives for overseas earnings and the last point is the notion that anything denominated in a declining currency will continue to appreciate. Hence, gold and stocks alike could continue to run up. While the US Dollar could see weakened purchasing power against particular currencies like the Canadian Dollar or Aussie Dollar, in dollar terms, the ADRs and emerging market share prices in terms of US dollars could continue to run. While the countries involved in EEM are viewed as “developing” and rather risky, to take this trade a step further, consider the more volatile Frontier Markets.

Once Hated Sectors – Redemption

VHT - Vanguard Health Care ETF - The Healthcare sector may be the most hated from the prior administration since curtains were pulled back on some very unsavory practices and the notion of “profiting from people’s misery” and declining coverage for people in need were used as key drivers to sell healthcare reform. While the reform legislation proves to be tough on the industry and a complete repeal of the legislation is highly unlikely, the new makeup of Congress lends itself to modification of provisions that may be more friendly to the industry. Facets of the bill that are problematic may be repealed if politically inert, while focusing on the bigger accomplishments like the inability to deny coverage for pre-existing conditions and childrens’ coverage through age 26. Obama hinted as much during his conciliatory speech on Wednesday. Any net improvement from the current legislation should be viewed as a positive for share price appreciation.

PPA - PowerShares Aerospace & Defense - While the expenditures in Iraq and Afghanistan are winding down, these prospects are already built into share prices. With a more right-leaning Congress, the prospect of further cuts to spending or a more rapid drawdown of defense spending may be inhibited. A strengthening Republican presence should be viewed as a positive for the industry, not to mention multiple international hotspots like Iran and North Korea that could quickly escalate into a full-scale military confrontation at a moment’s notice. Israel is growing weary of Iran’s continued nuclear ambitions and there was an exchange of fire on the Korean border earlier in October, months after the sinking of a South Korean vessel. A fully Democratic Congress would be viewed as less likely to act compared to a Republican controlled House and stronger Senate.

VDE – Vanguard Energy ETF - Along with the investment banks, another hated sector has been the energy sector (if you’re not green). With the recent memory of $140 oil prices and the BP disaster in the gulf, a fully controlled Democratic Congress could have been continuously hostile toward the sector with their targets on further oversight, regulation and windfall taxes. The prospects of these risks have been diminished substantially given the election outcomes.

Further Analysis

It’s tough to say which sectors have already had their share prices discounted or boosted to reflect the current reality, but often times, these are short-term moves. When looking at the broader implications of a complete rebuke of the current administration’s agenda and the strongest reversal in election results since the 1960s, there may be further follow-through in the 2012 election which could really boost some of the right-favored sectors even further throughout the next couple years. As far as ancillary implications from today, it’s unlikely that congress will now allow another round of dumb stimulus spending, but many bond analysts are predicting that the 10-year will decline further as a result of this latest round of Quantitative easing, and amazingly, there’s already talk of a QE3.

The impact of these massive easing programs will be evident in even lower mortgage rates which tend to reset Thursdays, which in turn, should be able to free up some additional cashflow for consumers and small businesses. At some point, the spending has to reverse and the Fed will have to reign in these programs, but until the economy shows considerable improvement, we’re likely to see this environment of low rates and Treasury purchases continue.

Disclosure: Long GLD

Source: Seven ETFs That May Benefit From Election, QE2 Results