Recent events have made it clear that the Republican party really contains four distinct groups increasingly at war with one another. It is possible for an individual to be a member of more than one of the four groups but the four groups tend to have very different thematic agendas. The four groups are listed below.
1. Libertarians - This group generally wants to reduce the size of government and reduce the intrusiveness of government regulations. It is epitomized by Ron and Rand Paul but includes many other Republicans. It generally advocates legalization of marijuana and generally supports what could be called an isolationist foreign policy. It is a group which can garner a great deal of support among young voters.
2. Social Conservatives - This group - led by Rick Santorum and to a lesser extent Mike Hukabee - focuses on moral values issues. It would oppose the legalization of marijuana, gay marriage, abortion, perhaps some forms of birth control, gay rights in general, legalized gambling, and other measures viewed as encouraging immorality. It implicitly supports a greater role for the government in supervising matters which the libertarians consider to be "nobody else's business." Some elements of this group are strong supporters of Israel based on scenarios drawn from the Book of Revelations.
3. Foreign Policy Hawks - This group generally supports a "tall in the saddle" foreign policy and a robust national security apparatus. McCain and Bush 2 were probably in this group. It tends to support increased defense spending and intervention in foreign disputes. Together with the libertarians, the inclusion of this group in the Republican party oddly puts the most dovish (libertarians) and the most hawkish Americans together in the same political party.
4. Pro-Business Republicans - Calvin Coolidge once said that "the business of America is business." This is the Chamber of Commerce, Wall Street, retirees who invest in the stock market, etc. Romney is in this group. So too, Boehner, Steve Forbes, Trump, Bloomberg, and many Republicans from Blue states. Coolidge won be one of the largest majorities of any Republican in history. This group generally favors policies that help American business. This can sometimes mean less big government and it can sometimes mean more big government. Similarly, in foreign policy, it can sometimes mean more intervention aboard but it usually means less. The group would generally support things like the legalization of gambling at the state level because this would bring business to the state and reduce the need for taxes. It is now beginning to be skeptical about the national security state because that may make it harder for some US companies to do business abroad.
There are more and more issues on which these four groups tend to come into conflict. Immigrations cuts across the different groups. Issues like the Export Import Bank pit libertarians against business Republicans. Getting tough with Russia tends to pit foreign policy hawks against business Republicans and libertarians. The four groups have created a public policy minefield for Republican politicians who must constantly be wary of taking positions which may offend one or more of the groups. In some situations, it is impossible to find a position which does not offend at least one of the groups. Immigration is probably such an issue.
The Democrats should try to emphasize "wedge" issues which divide these various groups but are more likely to stumble into positions which allow the groups to unite. For example, providing federal funding for sex change operations is one of the few issues on which social conservatives and libertarians are likely to be able to unite in opposition. Republicans can also likely unite in opposition to bureaucratic bungles (the VA situation, possibly Bergdahl, Benghazi, etc.) and so we will hear more about these things going forward.
On foreign policy, the Democrats are generally reactive. Ever since LBJ replaced JFK, Democrats prefer domestic policy and see foreign policy issues as distractions. They tend to follow an "evening news" approach, being forced to focus on issues highlighted by the media without having any overall strategy. They also are terrified that foreign policy hawks will depict them as "wimps" and so they tend to stumble into things like Vietnam, the Soviet grain embargo, support for the Arab Spring, voting in favor of the Iraq War, etc. without having any strategic vision of how such measures fit into some definition of the national interest and without a clear plan for ultimate resolution. This allows Democrats to be simultaneously attacked by hawks and doves (as happened in Vietnam) because the basic problem is one of competence.
The Republicans have to hope that their internal fissures are papered over by the Democrats delivering them on a silver platter some issues which they can use to unite the troops. The Democrats will probably be up to the task but the fissures among Republican groups are becoming so wide that we may begin to see them become irreconcilable.
What does this mean for financial markets? First of all, I would not count on the ability of the Republicans to come running if there is need for another "bail out." Libertarians and probably social issue conservatives would not likely support such action. Try to stay away from companies with too much leverage. Secondly, government contracting may become a tricky area as the Republicans (in search of issues on which they can unite) will focus more and more on "oversight" of government agency action in the hopes of uncovering bureaucratic corruption or bungling.
The Republican party is evolving in new directions and the next couple of cycles will be of critical importance. We have seen this evolution in the past (from Lincoln to the pro-business gilded age Republicans to the Progressives to the anti-New Deal Republicans to the Eisenhower Republicans, etc., etc.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.