The midterm elections carry high stakes not only for the contestants but also for the U.S. stock market and investors. With Democrats flipping the House and GOP retaining Senate, it would get hard for policy initiatives to move forward. However, such a gridlock bodes well for healthcare and defense stocks, which makes investing in such a space a lucrative choice for the time being.
Democrats Take Over House, Republicans Hold Senate
Democrats took control of the House of Representatives but lost ground in the Senate as the historic “blue wave” they hoped failed to materialize. This achievement, however, means that the Republicans will no longer control both wings of the Congress, handing Trump’s political opponents a stronghold in Washington and that in turn could change the outlook for the 2020 presidential election.
Democrats, in fact, now can easily veto Trump’s proposed laws in the House and launch a string of investigations into the Trump administration with aid of the committees they will control. However, the Senate will be a completely different story. Republicans’ successful defense of the Senate in the midterms indicates that many of the President’s supporters are still standing by him two years into office.
Projections further suggested that the Republicans could easily increase their majority in the Senate. This will certainly help them push their controversial agenda related to judicial and cabinet appointments.
President Trump did boast of “tremendous success” despite painful House defeat. Sarah Sanders, the White House press secretary added that “anybody that was anticipating a blue wave tonight is not going to get it.”
Is Gridlock in Washington Good or Bad for the Stock Market?
With the government now divided, the obvious question that arises — does gridlock bode well for the stock market. Historically, stocks have always performed better during a unified government. Per BMO Capital Markets, the S&P 500 has increased on an average of 18% annually when the government is controlled by Democrats or Republicans. Meanwhile, the broader index managed to gain nearly 13% in case of a divided government.
In today’s market, however, things aren’t that bad in case of a divided Congress. Although the markets did get a nice pop in anticipation of tax reforms, the recent trade related issues have been a dampener. Consequently, Democrats controlling the House of Representatives will no doubt compel President Trump to tone down his hawkish trade policies.
But it’s just not the broader markets that should gain from a stalemate in Washington. Precisely, healthcare and defense stocks are the ones that should gain the most from this kind of a gridlock.
Divided Congress Bodes Well for Healthcare Stocks
A divided Congress should be helpful for healthcare stocks. The Affordable Care Act (ACA) has come under tremendous assault by Republicans following Donald Trump’s election in 2016. ACA has been subjected to a series of legislative changes. Democrats, however, now have taken over the House of Representatives and that is a blessing in disguise for the ACA.
With not much legislative changes under Democrats, things are surely looking up for Medicaid health maintenance organization (HMOs) and hospitals. And why not? ACA has always encouraged the development of Medicaid HMOs and benefited hospitals by reducing the number of uninsured patients who cannot pay their bills.
By the way, a split Congress should also benefit pharma bigwigs. This is because legislative action on drug pricing will be put off, something that has been plaguing the drug manufacturers in recent times. Notably, Amgen Inc. AMGN, Biogen Inc. BIIB and Johnson & Johnson JNJ to name a few should breathe a sigh of relief as many of their drugs derive sales growth from price increases.
Defense to Gain from Divided Control of Government
President Trump had approved the 2019 National Defense Authorization Act (NDAA) that authorizes a top-line budget of $717 billion. Democrats too have agreed to the increase in defense budget for fiscal year 2019. Thus, Democrats winning the House of Representatives won’t derail funding for Pentagon and this in turn should give defense stocks a boost.
Under the Energy department, the NDAA includes $616.9 billion for the Pentagon’s base budget, $69 billion for overseas contingency operations funding and $21.9 billion for nuclear weapons programs. The NDAA, by the by, is just one half of the process since the Congress still have to pass a spending bill to fund specific necessities. And with both the parties largely agreeing to such a defense budget, the spending bill will easily be green lit.
5 Solid Picks
Given such positives, investors should invest in solid stocks from the aforesaid areas to boost their portfolio. We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
HCA Healthcare, Inc. HCA, through its subsidiaries, provides health care services. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 1.3% in the last 60 days. The company’s expected earnings growth rate for the current year is 41.9% compared with the Medical - Hospital industry’s projected rise of 11.4%.
Molina Healthcare, Inc. MOH provides Medicaid-related solutions to meet the health care needs of low-income families and individuals. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for the company’s earnings rose 13.8% in the last 60 days. The company’s expected earnings growth rate for the current year is more than 100% compared with the Medical - HMOs industry’s projected rise of 19.6%.
Johnson & Johnson researches and develops, manufactures, and sells various products in the health care field. The company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 0.2% in the last 60 days. The company’s expected earnings growth rate for the current year is 11.8% compared with the Large Cap Pharmaceuticals industry’s projected rise of 9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lockheed Martin Corporation LMT is a security and aerospace company. It operates through four segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 2.7% in the last 60 days. The company’s expected earnings growth rate for the current year is 31.1% compared with the Aerospace - Defense industry’s projected rise of 20.4%.
The Boeing Company BA designs, develops, manufactures, sales, services, and supports not only commercial jetliners but also military aircraft. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 2.6% in the last 60 days. The company’s expected earnings growth rate for the current year is 24.5% compared with the Aerospace - Defense industry’s projected rise of 20.4%.
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Johnson & Johnson (JNJ) : Free Stock Analysis Report
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