Rising Tides: Political, Policy, and Fundamental Realities for Stocks

Whether you’re a Democrat or Republican, if you own stocks, you have to like what you’re seeing.  Even better for those of us who analyze and manage investments for a living – the views are becoming much clearer. 

Lately, we have been lamenting the amount of time and effort we’ve had to spend assessing the uncertain political outlook for so many industry groups we cover.   The new Republican majority in the House unquestionably removes a heavy political overhang from much of the domestic private economy.  And whether or not you agree with the ideology, the fact is that stocks do better when the underlying companies have clearer paths to future profitability growth.  For example, if the GOP majority reduces the risk of mass unionization across a broad range of industries, the risk of lost profitability due to artificially high hourly wages is also reduced.  Put another way, the projected earnings of Wal-Mart and Home Depot are now more likely to be achieved.  When earnings projections are more certain, investors are willing to pay more for those earnings, and the P/E rises, resulting in a higher stock price.  Today, because the likelihood of so many far-reaching business impediments has been blunted, the broad market can achieve a higher valuation like a rising tide lifting all boats.    

The Fed’s QE2 announcement this week reiterated the “lower for longer” outlook for interest rates, which removes a significant headwind for generally higher stock multiples.  (Interest rates and P/E’s are normally inversely correlated.) 

Aside from the macro environment impacting the broad markets, we are thrilled by the idea that we can shift our analytical focus back to the company fundamentals (the “E” in P/E) that drive stock prices long-term.   Like investors, business owners and managers grow more confident with greater clarity, becoming more inclined to invest in capital goods and earnings-enhancing projects.  And on that front, the tide is also rising.  Third quarter results are again exceeding expectations – both revenues and earnings.  Just as our analytical views are clearing, the forecasting fog must also be lifting for corporate managers.  Qualcomm (QCOM), just one example, sees 15% revenue growth in 2011.

Peloton Wealth Strategists owns the common stock of The Home Depot, Inc. and Qualcomm, Inc.  Peloton Wealth Strategists does not own the common stock of Wal-Mart Stores, Inc.  The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities.  Peloton Wealth Strategists assumes no liability for losses pursuant to investment actions entered into as a result of opinions expressed herein.  Changes in economic and capital market conditions and the unique objectives of each investor should be considered before investing in securities.

Posted in Current Updates