By this time next week, we should know what the next phase of the U.S. government will look like after Tuesday’s midterm elections.
My colleagues Matt Clark and Charles Sizemore each took their turn handicapping the potential winners… Market winners, that is.
Matt explained that the stock market as a whole tends to perform well under gridlock.
When a Democratic president is in the White House and Republicans control at least one half of Congress, the S&P 500 has returned a healthy 13%. Investors are comfortable with a middle-of-the-road, divided government that can’t push too far in either direction.
Charles discussed the outlook for the bond market.
The last time we had a Democratic president and Republican Congress was during Barack Obama’s presidency. And that was about the most dysfunctional our government has ever been, with perpetual fights over the debt ceiling and government shutdowns.
But one benefit of that chaos was that it kept a lid of sorts on government spending and helped to shrink the budget deficit. If we get a repeat of that going forward, it should be good for bonds.
Today, I want to dig deeper into a specific sector that may benefit from Tuesday’s outcome.
One Sector to Watch After Tuesday’s Midterm Elections
It’s important to remember that, even in a gridlocked government, the party that controls Congress controls the legislative agenda and spending priorities.
Most of the polls point to a Republican win in the House of Representatives. The Senate is going to be closer. But for now, it would seem that we should prepare for Republican spending priorities.
One obvious winner here is the defense industry.
A Republican-controlled House would be aggressive in its push to oppose the Biden administration’s spending priorities. But if history is any guide, President Joe Biden and his team will not reduce military spending. If anything, they might insist on increasing it, given the current tensions with Russia and China.
Of course, not all stocks within the defense sector are created equal.
Defense Sector Stock Power Ratings X-Ray
Let’s take a look at how some of the major players in defense and aerospace rate on my Stock Power Ratings system.
It’s clear we should avoid some of these. The Boeing Co. (NYSE: BA) is one of the lowest-rated stocks in our entire universe of stocks with a rating of less than 0 out of 100!
BA’s Stock Power Ratings in November 2022.
Raytheon Technologies Corp. (NYSE: RTX) doesn’t look great either, rating a “Bearish” 22.
Textron Inc. (NYSE: TXT) rates better, at a “Neutral” 52. But that only looks good when compared to the previous two!
But there are some bright spots here.
Northrop Grumman Corp. (NYSE: NOC) rates a respectable and “Strong Bullish” 82.
NOC’s Stock Power Ratings in November 2022.
Historically, “Strong Bullish” stocks in my model have enjoyed returns triple that of the market in the 12 months that follow!
I wouldn’t call Northrop Grumman cheap, rating a 32 on my value factor. It also loses some points due to its massive market cap of more than $81 billion, which is why its size factor rating is just 5. But it boasts strong ratings on my momentum, volatility, quality and growth factors.
Regardless of how the election pans out, Northrop Grumman is an interesting trade within the defense sector based on my Stock Power model. We can consider any favorable bump it gets from an increase in defense spending as icing on the cake.
And speaking of defense stocks … in my upcoming issue of Green Zone Fortunes, I will recommend a stock that sits at the crossroads of the green energy revolution and the need for stronger national defense.
To be one of the first to gain access to my next recommendation and to learn more about how we’re following the green energy mega trend, click here.
To good profits,
Adam O’Dell
Chief Investment Strategist