By David Gaffen
NEW YORK (Reuters) - House Majority Leader Eric Cantor's shocking defeat isn't likely to have much effect on U.S. financial markets -- unless his departure emboldens Tea Party Republicans to again threaten a government shut-down over the debt ceiling next year, investment strategists said.
Even though most of the items on Wall Street's legislative wish list, particularly corporate tax reform, were already viewed as non-starters over the next two years, Cantor's departure may roil the relative calm that's prevailed since the bipartisan budget deal of December 2013.
"It underscores total political dysfunction," said Doug Kass, president of Seabreeze Partners Management in Palm Beach, Florida. "At some point the danger of no deal on the debt limit or increased wrangling raises the likelihood of a major repricing in stocks."
The Tea Party Republicans who supported the 2013 government shutdown may believe that Cantor's defeat opens the door to another such battle, according to Greg Valliere, chief political strategist at Potomac Research Group in Washington. Dave Brat, the professor of economics who beat Cantor in Virginia's 7th Congressional district, has said in the past that he doesn't support raising the federal debt limit.
"An ugly, market-rattling debt ceiling fight now looms in March 2015," potentially undermining the record-breaking run the S&P 500 has put together over the last couple of years, Valliere said in a Wednesday note.
Stocks slumped during the last debt ceiling battle in October 2013, only rebounding once negotiations to pass a budget and "suspend" the debt ceiling turned more constructive. Since Oct. 10, 2013, the S&P 500 has gained 17.3 percent.
The 2013 deal set spending limits through the end of 2015, and the 2011 Budget Control Act also set spending caps through the end of the decade. Still, the Tea Party's focus on the debt limit as a symbol of government spending run amok serves as a key rallying point.
Cantor is stepping down as House majority leader at the end of July. Other investors were less sure that new House leadership would want to risk losing more public support by fighting the debt ceiling again, saying that they would more likely focus their battle on the growth in entitlement spending.
"I don't think there's any consensus in the House to try to take on that (debt limit) again," said Dan Alpert, managing director at Westwood Capital in New York. "Most people are focused on maintaining the pressure on entitlements going forward."
Issues such as immigration reform or a corporate tax holiday allowing companies to repatriate overseas earnings without penalty were already long-shots, and a re-energized Tea Party smelling possible November victories in Senate races in Mississippi or Iowa could move the GOP even further right.
"There's this tangible disquiet and Cantor's loss shows a lot of discontent among Republican voters on spending, debt, and budget issues," said Loren Smith, research analyst at Capital Alpha Partners in Washington.
Though most investors don't see a real problem for the broader stock market, unless a debt battle materializes, Wall Street is losing one of its favorite politicians.
With contributions of $1.4 million, Cantor received more donations from the finance, industry and real estate sector in the 2014 election cycle than any other House member other than House Speaker John Boehner, according to the Center for Responsive Politics. Top donors include Goldman Sachs Group Inc, Citigroup, Blackstone Group and hedge fund Canyon Partners.
"I thought it was stunning," Goldman Sachs chairman and CEO Lloyd Blankfein told CNBC this morning. "I hope it doesn't mean that it'll be impossible from this point forward to compromise on issues like the budget, on immigration policy or on any of the other issues wracking the economy."
To be sure, Cantor's potential replacement as majority leader, Jeb Hensarling of Texas, the current chair of the House Financial Services Committee, isn't far behind with contributions of $1.09 million for this cycle. His top contributors come from insurance companies, as well as banks including JPMorgan Chase & Co and Zurich-based UBS AG.
"A basic lesson of markets is that all politicians are replaceable instantly, except the President who is replaceable almost instantly," said Ken Fisher, founder and president of Fisher Investments. "Cantor? He will be forgotten faster than you can say [former Virginia Representative] Tom Bliley (his predecessor you may recall)."
(Reporting by David Gaffen; additional reporting by Andy Sullivan in Washington, editing by John Pickering)