Republicans Expected to Win 2012 Elections

FBR Capital Markets expects the cycle of disappointments coming out of Washington D.C to reach an inflection point later this year, creating an opportunity for investors to begin looking ahead to the November 2012 elections as cause for optimism.

After years of policy battles dominating headlines and weighing on sentiment, we believe that we are approaching an inflection point where these decisions will provide a positive shift in sentiment as the outcome of the 2012 election comes into focus, said Edward Mills, an analyst at FBR Capital Markets.

With a little less than a year until the election, Mills believes that the Republican Party is well positioned to win a majority in both the House and the Senate. In the battle for the Presidency, Mills believes Mitt Romney is in the best position to capture the Republican nomination and will be considered the favorite in a battle against President Barack Obama.

As this scenario plays out, Mills believes investors will warm to sectors that have been under considerable scrutiny in recent years, especially financials, energy, and defense.

Mills said the fourth quarter is likely to be marred by contentious political fights in Washington that dominate headlines and weigh on investor confidence, including the failure of the Super Committee and fights over fiscal 2012 spending.

In contrast, early 2012 could be an opportunity for investors to begin looking beyond Europe and the volatile U.S. debt policy to the increasing probability that Republicans will win the White House. If the Republicans nominate a candidate with electability, Mills believes that investors will quickly begin discounting the President's chances for reelection.

While we certainly recognize that politics and elections are a volatile business and that anything can and will happen over the next 11 months, Mills believes that if the election were held today, the most likely scenario would be an all-Republican government (House and Senate majority/Obama loses reelection).

Mills sees two primary risk factors to his view on a Republican victory in 2012; the first is economic growth, and the second is candidate quality. He noted that the U.S. jobs growth needed to preserve the Obama presidency would be correlated to other positive economic trends that would drive positive investor sentiment regardless of the outcome of the election.

Should Obama win reelection, Mills still is very confident that Republicans will win a majority in the Senate and maintain their majority in the House. Under this scenario, Republicans will have an increased ability to influence, change, or block regulations that have weighed on investor sentiment.

Mills said the most immediate impact of an all-Republican government would be a diminished concern about the tone and direction of policy coming out of Congress and the White House.

We believe that a significant shift would take place within the regulatory agencies in their implementation of policies. In Congress, we believe that there would be significant efforts to tackle fiscal reforms, including entitlement reforms and changes to the corporate and individual tax codes, said Mills.