Tuesday, September 11, 2012

The stock market likes government gridlock

The probability of another four years of gridlock in Washington is rising as shown by the combined odds of Obama's reelection and the House controlled by Republicans.

Source: JPMorgan

Many investors of course complain about how bad this is for the financial markets. But is this outcome really bad for the stock market? The S&P500 is up 15.75% YTD (including dividends) - is that an indication of a market concerned about an impasse in DC? The reality is the market may be liking this more than people realize. It is possible that much of the fiscal cliff will be kicked down the road, and no major changes in government spending will actually take place. Again people will say this is a horrible outcome. But if you are a blue chip US company, is it really that bad?

GE, Pratt & Whitney, Boeing, United Technologies, Lockheed Martin, General Dynamics, Raytheon, IBM, Oshkosh, McKesson, BAE Systems, L-3 Communications, SAIC Inc., just to name a few, are some for the large firms that count the Federal government as a top customer and benefit from the status quo in Washington. Fedex is in the middle of it, loving all the government shipping. Pharmaceuticals and suppliers like McKesson and Cardinal Health count on the government for massive contracts to supply the military as well as making money on all the Medicaid/Medicare fun. Accountants like Deloitte do tons of "bean counting" for the Federal government and ring the register. AT&T "reaches out and touches" many government employees.

Of course Microsoft provides software for most government PCs (while Dell supplies the hardware). But so does Google these days with Google Apps, Google Docs, Calendar and Sites, as it benefits from more government spending. And if you think Apple just sells to the private sector, think again - here is different kind of Apple Store.

Wall Street likes to talk about the evils of government spending, but beneath it all portfolio managers (when they actually think about where their portfolio companies make money) and of course a number of company executives want their big client Uncle Sam to keep on spending. Eventually it will be time to pay the piper, but for now life is good with the US government in status quo mode...

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