Republicans gained sixty seats in the House of Representatives, the largest gain since 1938 while also gaining six seats in the Senate. If nothing else, the mid-term elections have sent a clear message to all of our congressional representatives, “We don’t like what we’ve been seeing!” Republicans now have control of the house while the Democrats maintain control of the Senate and Oval Office…in other words, ‘gridlock’. How will these changes impact the economy and your investments? Generally speaking, gridlock will be a good thing for both the economy and the stock market. Uncertainty has been one of the major roadblocks to economic recovery as corporations have been reluctant to invest in expansion, technology and people under the cloud of uncertainty regarding future regulation and taxation. Instead, they have focused on the pieces of the puzzle for which they have the most control…expenses. The results have included substantial layoffs and the storing up of cash. Gridlock tends to create greater certainty regarding future legislation because any changes must be worked out through a process of compromise. The new mix of congressional representatives will give corporations the confidence to use their resources to seek out opportunities.
How can you use gridlock to advance your own financial situation?
- Invest in blue chip stocks. While the stock market will always remain volatile, now would be a good time to begin to shift some money from fixed income (CDs, bonds, bond mutual funds and money market funds) to stocks. An excellent choice is blue chip stocks that are paying a dividend. Many of these companies are paying a dividend that is substantially higher than the interest currently being offered on high quality bonds. Good examples include AT&T and Verizon who each pay a dividend of about 5.8%; Southern Company whose dividend is approximately 4.8%; and Eli Lilly paying a 5.5% dividend. As the fear that has driven the stock market over the past twenty-four months gives way to optimism, investors, particularly retirees, will begin searching for conservative investments with higher returns and blue chip stocks will be in that ‘sweet spot’.
- Invest in small company stocks. Smaller company’s, while typically more volatile, may benefit more than the Fortune 500 companies as they are able to react and deploy resources more quickly. You’ll want to own a big basket of stocks for this category. Consider a no-load fund like Vanguard’s Small Cap Index Fund (VSCIX).
- Invest in international stocks. As the U.S. economy goes, so goes the rest of the world. More undeveloped countries such as Brazil, Russia, India and China are likely to outperform the more developed countries of Europe, but all should benefit as the U.S. economy improves. Again, you’ll want a large basket of stocks so consider a fund like Vanguard Total International Stock Index (VGTSX) or Vanguard Emerging Markets Stock Index (VEIEX).
Your allocation between stocks and bonds will continue to be of vital importance and must be tailored to your particular facts and circumstances. Consider seeking professional counsel before making substantial changes to your investment strategy.