Political gridlock: Good news for big stocks
If the November elections bring a politically divided government as expected, that would help bonds and some types of blue chips.
NEW YORK (Money) -- No man's life, liberty or property are safe while the Legislature is in session, according to a 19th-Century New York State judge. And similar reasoning applies to the stock market: Political gridlock should be better for the economy than an overly energetic government.
For that reason, it is widely believed on Wall Street that stocks are likely to do best when at least one house of Congress is held by a party different from that of the President.
As the November elections approach, the Democrats appear to have a good shot at winning one of the Houses of Congress - or at least shaving the Republican majority so thin that activist government would be practically impossible.
To see if the conventional wisdom about divided government is true, three analysts recently did a statistical study of the economy and the investment markets over the past 56 years (Financial Analysts Journal, September/October 2006, by Scott Beyer, Gerald Jensen and Robert Johnson).
Previous research has shown that unified governments really are more active, and that they spend more, run larger deficits and potentially allow more inflation.
The three analysts found that some results agree with the conventional wisdom. In particular, bonds tended to perform better during periods of gridlock. The reason: lower interest rates and less investor concern about inflation.
Surprisingly, however, the stock market as a whole performed better during periods of unified government. In particular, small and mid-cap stocks earned almost all of their above-average returns during periods of political harmony.
The stock market exception was blue chips. Shares of the largest and most dominant companies did benefit materially from gridlock.
In general, it appears that smaller, more nimble companies find profitable opportunities during active administrations. By contrast, the largest corporations get to exert more muscle when the government isn't doing much.
Is there any guidance for current investing decisions in these findings? I can see two things.
First, don't expect long-term interest rates to soar. Bonds may not offer high enough yields to be a compelling buy. But the environment may actually be moving slightly in favor of fixed-income investments. Include bonds in your total portfolio mix where you need them - and don't worry too much about the direction of interest rates.
Second, shares of the biggest U.S. corporations are way overdue for a rally. Despite the Dow flirting with all-time highs, a lot of big stocks are greatly lagging the broad market. And the economic environment could be about to shift more in their favor for a lot of reasons, including the upcoming elections.
This is a particularly rewarding time to be bargain hunting among stocks like those in the Sivy 70. Here are five companies that look attractive right now, based on valuation and growth, and each has received a recent new buy rating from an analyst. The stocks are: Burlington Northern (Charts), General Dynamics (Charts), Nike (Charts), Omnicom (Charts) and Target (Charts). See stats on them in the table below.
P/E and dividend information from Thomson/Baseline
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