Close vote, uncertain future(s)

NEW YORK (CNNMoney.com) -- Signs that there could be a prolonged legal battle to determine control of the U.S. Senate, following Democratic capture of the House, could help send stocks lower when markets open Wednesday.

Nasdaq and S&P futures indicated a lower Wednesday open.

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As of 6:13 a.m. ET, Democrats had gained 27 seats in the House, 12 more than needed for them to take control of the chamber for the first time in 12 years. They had also gained four Senate seats, two shy of what was needed for control, although Democratic candidates were holding narrow leads in two other states, Virginia and Montana, where a final outcome was yet to be determined.

Futures fell when television news networks projected Democratic control of the house late Tuesday night and declined a little further in the early hours of Wednesday as it became apparent that control of the Senate race could be determined by a prolonged recount in Virginia.

Virginia Democratic Senate candidate James Webb held a 7,847-vote lead over incumbent Republican Sen. George Allen, with only a handful of precincts yet to report as of 5:54 a.m. ET. That represents only 0.3 percent of the votes cast in that race, virtually assuring a recount.

CNN's legal analyst, Jeffrey Toobin, said that a statewide recount in Virginia in 2005 lasted until almost Christmas, meaning that there could be months of uncertainty over control of the Senate, which is likely to unsettle Wall Street.

Democratic candidate Jon Tester was ahead of incumbent Republican Sen. Conrad Burns in the Montana race by a narrowing 1,586-vote margin at 8:14 a.m. ET, that was 0.4 percent of the votes cast in the sparsely-populated state, with 99 percent of precincts counted, leaving the race still too close to call.

Beyond the uncertainty due to the close elections, analysts didn't expect the markets to get too flustered if the Democrats were to win the two outstanding races. Art Hogan, chief market strategist for Jefferies & Co., said the stocks had already rallied in anticipation of this kind of split control of the federal government.

"If you look at what expectations were, we knew the House of Representatives was in the bag for the Democrats while the Senate was a coin flip," he said. "I don't think the market would celebrate the Senate getting a Democrats majority. But what's been celebrated in the markets for the last couple of days is gridlock. Gridlock is a good thing in so much as you don't get drastic changes in economic policy, you're not going to see big regulatory change."

But Hogan and other experts say if there are two months of uncertainty over who will control the Senate, it could weigh on stocks. The blue chip S&P 500 index lost about 4 percent throughout the recount dispute that followed the 2000 presidential election.

John Silvia, chief economist for Wachovia, says that investors will be more upset about uncertainty than they are about any Democratic gains.

"Like 2000, it's a situation that you're going to sit there for a month or two with lawyers fighting and that creates a lot of uncertainty," Silvia said. "In all phases of life if you know something it's better than uncertainty."

One economic issue that saw gains at the ballot box Tuesday was a higher minimum wage. Voters in six states voted to raise the minimum wage in their states in referendums Tuesday, and leaders in the newly-elected Democratic House vowed to pass an increase in the national minimum wage.

Hogan said that expectations of a higher minimum wage could hit stocks going forward because of fears that it could be inflationary. He said that if the Federal Reserve sees a move to raise the minimum wage, it could delay the interest rate cut still expected by investors some point early next year.

"The short-term reaction by markets is that (a higher minimum wage) will be an inflationary pressure," said Hogan. "If there are things that the markets are concerned by, it is how the economy slows down and what inflationary pressures we see. The lower unemployment rate reported Friday starting raising inflation concerns. This will add to that."

Hogan said that some major companies, especially discount retailers, will benefit from the higher wage, as it puts more money in the hands of their customers. For example, Wal-Mart Stores (Charts) CEO Lee Scott came out in favor of a higher minimum wage a year ago.

Two other ballot measures with business implications had split results. Voters in Missouri narrowly approved a measure to protect embryonic stem cell research, specifically legalizing all stem cell research and therapies consistent with federal law. That could be a lift for the stocks of some biotech companies in the field.

But 55 percent of voters in California rejected a proposal to create a $4 billion program to reduce petroleum consumption by 25 percent through support of research and production incentives for alternative energy sources and vehicles. The funding would have come on a tax on producers that use oil extracted in the state.

Exit polls indicated that the economy was the third most important issue in the election, behind the war in Iraq and terrorism. Of those surveyed, 50 percent gave a negative view of the economy, and Democrats captured the lion share of those who feel that way.

On the economic calendar, the Energy Information Administration's weekly report on oil inventories is due at 10:30 a.m. ET. Oil prices were higher in early trading ahead of the report.

Besides the election, quarterly reports will be among the factors in the market. Those due to report before Wednesday's open include Federated Department Stores and utility PG&E. Sirius Satellite Radio (Charts) narrowed its loss to 12 cents a share, beating forecasts of a 14 cent a share loss.

After the close come two closely watched results, network equipment maker Cisco Systems (Charts) and media conglomerate News Corp.

In other corporate news, published reports say Google (Charts) is preparing to sharply increase the scope of its radio-ad sales business, following an agreement announced earlier this week between the Web search and advertising firm to partner with newspaper publishers to sell print advertising.

In another sign of the weaker home building market, Hovnanian Enterprises (Charts), the No. 7 builder said late Tuesday said it expects to report a net loss in the fourth quarter due to land related special charges. Hovnanian, the nation's No. 7 home builder, is the first major company in the sector to report a loss due to the current slowdown.

Drugmaker Merck & Co. (Charts) faces a potential $5.58 billion in tax liabilities from U.S. and Canadian authorities related to a number of disputes over accounting for past transactions, the company said in a filing Tuesday. Shares of Dow component Merck were off 0.7 percent in early trading Wednesday in Frankfurt trading.

Overseas markets also were nervous about the uncertainty in the U.S. election. Stocks closed lower in Asia, and stocks were also lower in early trading in Europe.

Treasury prices were higher, trimming the yield on the 10-year note to 4.64 percent from 4.66 percent late Tuesday. The dollar was lower against the euro and the yen.

--CNNMoney.com senior writer Alexandra Twin contributed to this report.

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