If you think defense spending is booming now, just wait until next year.
It looks like the Democrats are set to take a beating this fall during the Congressional mid-term elections.
Economic Misery Surging
There are a number of reasons for that likely result, but first among them is surging inflation, which has more than double in the last 12 months. It hit 8.5% in March up from 4.2% last April, according to data collated by TradingEconomics.com.
Inflation is half of the key metric known as the Misery index, which tracks the combined level of unemployment (as a percentage) and inflation. If that index increases during a congressional term then expect the incumbents to get tossed out.
In this case, the unemployment rate, which is low, doesn’t matter because it won’t offset the economic misery caused by inflation that has more than doubled.
On top of that, President Joe Biden’s mismanaged military retreat from Afghanistan was an embarrassment to America. It’s something that many people with a military connection won’t forget when they go to the polls in November.
UBS Says GOP Sweep Most Likely
That anti-incumbent sentiment is reflected in expert forecasts of the election outcome. The Republican Party has a 74% likelihood of taking control of both the House of Representatives and the U.S. Senate, according to a recent report from Swiss bank UBS AG.
The report states:
- “The probability of a GOP sweep has increased but the the competitive- ness of some elections in November will depend upon the identity of each party’s nominees.”
Personality does matter in politics, but still 74% chance of a clean sweep is overwhelmingly high.
Clean Sweep Still Needs Beltway Agreements
If that likely outcome occurs it will leave the White House with relatively paltry power. Biden will be able to sign executive orders, but anything big will need to go through Congress.
In general there is little that the GOP and Dems agree on, there is one thing that stands out: The need for more defense spending.
“[Defense] spending increases more significantly under this scenario,” the UBS report states. “[There is] bipartisan consensus on an adversarial posture toward China.”
What to Do?
If such scenario comes to pass — the GOP takes both houses — then expect defense industry contractors such as General Dynamics (GD), and Northrop Grumman (NOC), plus similar companies to benefit substantially.
The move would also help the U.S. catchup on much-reducing military spending over much of the last decade. World Bank data show that the U.S. military spent an amount equivalent to 3.7% of GDP in 2020 down from 4.9% in 2010. In other words, expect a double dose of spending on the war machine.
If buying individual stocks seems too risky, then consider investing in the iShares U.S. Aerospace & Defense (ITA) exchange-traded fund which tracks a basket of stocks in that industry.