The market, following the conventional wisdom, sees the most likely result of Tuesday's election to be a Democratic takeover of the House, and a narrow majority for the Republicans in the Senate, resulting in a divided government that would make it more difficult to enact major policies.

"If the Republicans do retain both houses, then the market is likely to have a short-term reaction rally," said Richard Bernstein, chief investment strategist for Merrill Lynch. "If the Democrats win both houses, then the market is likely to have a short-term reaction sell off."

Bernstein cautions that the election may not change the fundamentals, which are what ultimately direct the markets. "There have been bull and bear markets under both Republicans and Democrats," he reminds.

"A total Democratic takeover might, at least temporarily, reinforce the market's recent pause," said Charles Gabriel, political analyst for Prudential Equity Group. Or, if the Republicans maintain control in the Senate, it "might spell relief for investors," at least in some sectors.

For all the markets, taxes are the overriding issue. For fixed income and currency markets, the size and the direction of the federal deficit could be the most important long-term fundamental.

The Democrats have said they won't try to repeal the 2001 and 2003 tax cuts, which are mostly due to expire in 2010. They wouldn't have the votes to get a repeal past President Bush's veto, anyway.

However, Rep. Charlie Rangel, who would head by the tax-writing Ways & Means Committee, has said that "everything" must be on the table if any attempt is made to reform the tax code to fix the alternative minimum tax, which is hitting more and more middle-class families each year. See full story.

Higher taxes could be coming in any case.

If gridlock wins the election, "it would be difficult for either party to change tax policy, so the previously enacted tax cuts will remain on track to expire in 2010," said Greg Anderson, currency market strategist for ABN Amro Bank. Higher taxes could lead to slower growth in the short run, which would negative for the U.S. dollar, he said.

But higher taxes could also lead to a reduced fiscal deficit and stronger growth in the long run, which would be positive for the dollar, Anderson said.

Any influence of a new tax policy would be seen only over time, Anderson said. "The two-year period before the next election isn't long enough for the fiscal deficit to impact economic growth potential or core FX flows."

A few contrarians on Wall Street think the election could have wider ramifications.

A major realignment could be coming from the anger and anxiety felt by the middle class at the dual economy that's been developing; one for the ultra-rich and one for everybody else said Barry Ritholtz, chief market strategist for Ritholtz Research & Analytics.

"It's more than Iraq, the budget deficit, earnings and inflation," Ritholtz said. "We can expect to hear questions raised about fundamental fairness, given how the benefits of the tax cuts have accrued primarily to the top percentile."

An even more dire view comes from newsletter writer Peter Grandich, who says the election results "can only lead to more division at a time when the world no longer wishes it had an Uncle Sam."

Grandich said the United States' time as the undisputed power is ending, in large part because it is engulfed in a mounting sea of debt. The "Don't Worry Be Happy" crowd on Wall Street will try to keep the party going until their bonuses are paid, he said.

"The next several weeks are strictly selling opportunities," Grandich said.

There are more hopeful voices.

"We think it's important to note that major shifts in domestic and international policy only seem possible when we have gridlock and there is a risk taker in the White House -- that is someone who is willing to set aside conventional wisdom to try a different direction," said Jim Anderson of SVB Asset Management. "Some of the worst ideas come to life during periods of political harmony."

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