Corporate executives always risk something when they decide to grow their businesses, to hire more people, to expand into new markets. Given the inherent risk of failing at something when you take on additional risk, you don't want to do so unless you are confident -- or at least more confident than you have been.
Last night's election result makes every business executive more confident about risk than he or she may have felt before the election.
Politics has become so charged in this country that it's difficult to even talk about with people not making personal judgments about those who discuss these issues. But I am speaking strictly from the point of view of an executive at a big or small company. I know that these people are thrilled, at least ECONOMICALLY, by the Republicans taking over the Senate, because they will be more y confident that we have seen the high water mark in government involvement in U.S. commerce for this era. They will be more confident that they have seen the peak in taxes, both corporate and individual. They will be more confident that corporate power will trump labor power. And they will be more confident that there will be fewer, not more regulations passed by the federal government.
In short: they will be willing to take on more risk, which means there will most likely be, given all other factors staying the same, more corporate formation, more growth and more new borrowings.
Now, I don't want to get polemical. I want to be empirical. So rather than just tell you here's what you can buy off this election, let me lay out the pros and cons of buying anything.
First, if you thought nothing was going to happen before in Washington, then welcome to official gridlock. I think we have a totally intransigent president who will have no important friends in congress and a congress that hates the president: not conducive to getting anything done. So don't expect anything instantly out of the gate.
Why does that matter? Because in the end if the futures run the market up you are stuck with the earnings that we are getting as soon as the futures reach their apogee. In other words, this election isn't going to make you want to stop selling FireEye (FEYE) or zulily (ZU) or HomeAway (AWAY). It's not going to make you want to go buy the oil producers, because the estimates for the group, for the most part, are too high. IF you doubt that, watch EOG Resources (EOG) and see how long it can stay up this morning with oil going down, despite terrific earnings. You won't think,"'hmm that's the last bad quarter for TripAdvisor (TRIP) or Michael Kors (KORS)," because you JUST got that first bad quarter! It just doesn't work like that.
Second, because the government runs out of money in December, there will be plenty of people who say that the market was doing fine with the old gridlock as Republicans and Democrats had developed a working peace. I think that some will think this means war: government shutdown, debt ceiling threats, etc. etc. I disagree. When I look at the candidates that won from the Republicans, I don't see a lot of radicals. I see a party that took the Senate by returning to the mainstream. The mainstream people don't want to alienate their business supporters. I don't think there will be a shutdown. Instead I think there will be a small deal made near-term with a bigger prize held out for next year: larger corporate tax reduction.
But don't expect anything overwhelming. President Obama wants to raise individual taxes as a matter of course, because he feels the rich don't pay their fair share. So the standoff will continue, because there is no way Congress will raise individual rates with the way it is now configured. Again, the best way to think this through is to say we have hit the high water mark of intervention and not that taxes are about to come down. The president was not a friend of business before this election; he probably hates it more now. So don't be thinking here comes the repatriation money. It's always been about raising individual rates for this president, and the repatriation is an abstraction. Sorry.
Third, there are some specific stocks that can benefit but now, when you look at it, you can see that these stocks correctly anticipated this surprising event. I have been mulling over endlessly the missed quarter of Lockheed Martin (LMT) and how that stock's been unstoppable ever since. Mystery solved: the defense budget is done going down. Now it is going back up. That's good for General Dynamics (GD), Raytheon (RTN) and Northrop Grumman (NOC), too. But three weeks ago buyers figured out this election and now you are just taking out the smart people if you buy today.
Energy is tougher. If I have to read one more article about how this helps the Keystone pipe be built I will scream. The President, if it hasn't dawned on you by now, hates fossil fuel. The people who run TransCanada (TRP) aren't idiots. They have been frantically putting up various workarounds to get the oil they need to the Gulf refineries that can actually use the gunk to make gasoline. There will most likely be no pipeline, particularly given the new economics of lower oil prices.
Sure, there is a chance that the dirty coal utilities do better. But, like the defense stocks, the buyers figured these out, too. The biggest coal users have been the biggest winners in this utility rally. There will be no carbon tax. But there wasn't going to be one anyway.
I see people chattering about buying the medical device stocks, betting that stupid tax gets repealed. I think that's possible, but you don't want to buy the stocks of companies without the new technology that's winning. If you had one to pick, go buy St. Jude Med (STJ).
You believe in my confidence theory? Theoretically you can go buy the banks. But remember they need a different yield curve and that's going to require the dollar to stop going higher, the Fed to tighten and to have much more demand for money than seems likely. Still, they are a logical place to be. We have been buying SunTrust (STI) for the trust. I figure people will just go buy Wells Fargo (WFC).
You have to figure the more confident people are the more likely the employment rolls will swell, which means that you should be buying Automatic Data (ADP) and Paychex (PAYX) but even here there is a wrinkle: Friday's jobs report will become front and center by the end of the day and that controls the direction of these stocks short-term. I do like Paychex very much, though.
The election does advance the nascent move in restaurants that we are getting from the decline in gasoline prices. They work. But we have to be careful of the mall-based stores, given the Michael Kors "blame the mall" conference call. That means even more buying of perceived non-mall stores: Costco (COST), Ross (ROST), TJX (TJX) and, yes, Wal-Mart (WMT). Funny, being in the mall sure hasn't hurt L Brands (LB), has it? Just something to ponder when you employ the theory of mall negativity.
In the end, though, the election must be regarded as an overall price-to-earnings multiple raiser. The wildcard of a freelance president against business just became scarcer in the deck of stocks. That's bullish. The election's bullish. I know, don't bury the lead. But if I started with that, you would think I was about to tell you to start buying, but the far more important question is "what." I think I had to answer that first, before I reveal the ultimate takeaway of yesterday's seismic shift in Washington. Or, to put it another way, buyers will be willing to pay more for the winners with the good earnings streams, but it won't impact those companies that have seen or will see their estimates fall. They need much more than a Republican majority in Congress to see their stocks change direction.