A Few Observations on the Big Democratic Win

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— Yesterday's elections results bring to mind this quote from a recent story I wrote about the impact of a Democratic congressional victory. As a Bush administration official put it then, "The president is going to be a veto machine."

— Expect Democrats to force Republicans to cast a lot of uncomfortable "No" votes on issues such as raising the minimum wage, a windfall-profits tax on oil companies, and eliminating the 2003 Bush tax cuts on dividends and capital gains. Here is one scenario outlined this morning by economist Donald Luskin of TrendMacrolytics: Democrats extend the patch on the alternative minimum tax—which will hike rates on 15 million to 20 million taxpayers in 2007—and pay for it by repealing the 2003 tax cuts. "The GOP minority and the White House would face having to nix the AMT 'patch' for the sake of prolonging dividend and capital-gains relief. That would be a game of chicken, in which growth could well be the loser if the 'patch' ends up not being extended," Luskin explained.

— The stock and bond markets seem to be saying "meh" to the results so far. But expect to hear money managers and other Wall Street pros to start talking more about "policy risk" once the next Congress begins meeting. As Merrill Lynch economist David Rosenberg wrote this morning to the firm's clients: "Fully 90 percent of this rally in the S&P 500 since July has come via an expanded P/E multiple—in other words, the rally is not so much about the earnings outlook ... but about investors' willingness to pay more for that earnings stream and reflects a certain high level of confidence. What the election results do at the margin is strip away some of that certainty we had experienced at a policy and sector level for the last six years."

Of particular concern is a possible congressional rejection of new presidential trade authority and so-called headline risk: a grilling of oil and pharmaceutical CEOs by House and Senate committees. The latter won't affect corporate earnings but will probably provide some stock-price jitters.