We're just 90 days away from Congressional mid-term elections,
so it's time to think about what that might mean for investors'
portfolios. If it becomes increasingly clear that the GOP will
re-take control of one or both houses of Congress, it could provide
a lift to stocks before those elections. And not necessarily for
the reasons you think.
Tip of the hat
First off, I want to give kudos to James Surowiecki, the financial
columnist for the
magazine. He is, to my mind, the greatest financial writer of our
generation, consistently exploring economic and financial issues in
ways that the rest of us fail to articulate. His latest column,
from the August 2 issue entitled "
," makes a very important and little-mentioned point. Surowiecki
notes that cash-rich companies are sitting on their hands, citing
the popular notion that the Obama administration's get-tough stance
with business is a key impediment to capital spending. He rightly
notes that concerns about President Obama's policies may be more
imagined than real, but perception is everything.
Surowiecki goes on to suggest that the "Obama factor" is overblown
and companies are sitting on cash because few enticing options
exist. I disagree. Many companies can and should be seeking out
growth opportunities and are instead focusing on buybacks and
dividends because that's the safer path at a time when government
policy is in flux.
Not about the consumer
Many economists remain fixated on the consumer, fretting that an
ever-increasing savings rate and a distressed housing sector are
the real reasons behind the still-weak
. But you can't deny the fact that corporations are minting record
profits and should be on a hiring and capital expenditure spree by
companies are sitting on a hefty $1.8 trillion in cash. Buybacks
and dividends are a nice use of that cash, but investing in growth
initiatives still remains the best move for long-term shareholders.
And executives know that.
Even more gridlock?
Whether your politics skew to the left or the right, your portfolio
would benefit from a leadership change in this November's
elections. That's because investors -- and corporate executives --
know that when the White House and Congress are led by different
parties, it becomes much harder to make major changes to government
You could certainly argue that the current environment already has
too much gridlock, and these are very challenging times that call
for major systemic change, but the rhetoric could actually cool
down once the GOP has a greater stake in governing. (It's hard to
be a nay-saying opposition when voters see that you are in charge).
With the possibility of a cooling in combative GOP rhetoric and a
less aggressive White House, corporations may become more
emboldened to start spending and hiring, thus getting the economy
Past is prologue
In several respects, this era is shaping up to be a lot like the
1990s. In the early part of that decade, companies shed workers,
expanded profit margins and built considerable cash balances. Then
in 1994, the Clinton Administration was forced to deal with an
opposition-led Congress and moved closer to the center. That in
turn led to a more balanced gridlocked environment which led
companies to start opening up their wallets. A historic
ensued as capital spending rose and unemployment dropped.
Action to Take -->
There would be two clear beneficiaries of such an environment:
Capital spending plays first, and consumer spending plays after
that. On the capital spending front, technology firms would move
onto a nice growth path as companies sought out investments that
helped them gain an edge. Software giants like
Oracle (Nasdaq: ORCL)
and hardware giants like
Cisco Systems (Nasdaq: CSCO)
would start to merit an ever-increasing
multiple on steadily rising profits.
On the consumer spending front, food retailers, leisure-focused
companies and housing-related stocks would all benefit. Names like
, leisure-oriented firms like
Royal Caribbean Cruises (
and housing companies like
Toll Brothers (
would all benefit.
If it becomes apparent that the GOP has a strong shot at winning
back Congress in September or October, then shares could start to
rally ahead of the early November election.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.