It seems like only yesterday that the US was in the midst of a presidential election, yet we are now two years on and have reached the mid-term elections.
At the time of going to press, the results of the election were not yet known. However, the two houses of the US legislature are likely to change, with the Democratic Party set to lose its majority in both houses.
This is significant, since it means that the Republicans will be able to block new government legislation, a state of affairs that our cousins across the pond refer to as 'gridlock'. For the next two years, it is not going to be as easy to pass new legislation unless both parties agree. For most US-based companies, the economy has not been the only worry. They have also had to contend with the unpredictability of legislation coming out of Washington, causing many to be cautious in terms of expansion.
History shows that gridlock is not that bad for the stock market. Congressional change has happened six times since 1950, and in the following 12 months, the S&P 500 experienced an average 11 per cent gain (Source: Compustat and Goldman Sachs Global Research). The third year of the presidential election cycle, which falls in 2011, has typically proved to be a bullish one, regardless of congressional change, having shown average gains of 18 per cent for the S&P500 (1949 to 2007).
Of course, other factors can easily throw this bullish bias off course, but we also have the seasonal stock market bullish period just starting, which would give added support to stocks until at least the end of April 2011.
Just to recap, stocks make most of their annual gains between November and May each year. If you had invested $10,000 in 1950 and just stayed in the Dow Jones Industrial Average between 1 November and 30 April, you would have made $464,305, or an average return of 7.1 per cent. Had you done the exact opposite and invested on 1 May until 31 October and stayed out during the good period, you would have lost around $1,000 – so as you can see, a very big difference.
We also have the US Federal Reserve making it clear that it will do anything to stimulate the economy, and more quantitative easing is certainly due in the next 12 months. While the longer-term effects of money printing are very worrying, it could give markets a short-term sugar rush.
I would look at good-quality multi-nationals that are paying dividends. Since interest rates remain at historic lows and bonds are barely keeping up with inflation, I see a big move into dividend-paying stocks in the coming months.
One way to play this would be a good ETF, such as the Vanguard Dividend Appreciation ETF (NYSE: VIG) which holds well-known names that have a history of increasing dividends, among them PepsiCo, McDonald’s, Coca-Cola, Chevron, Procter & Gamble, International Business Machines, ExxonMobil, Wal-Mart, Johnson & Johnson and Abbott Laboratories.
Another worth considering is the SPDR Consumer Staples (XLP), which has a good spread of well-known names including Philip Morris, Proctor & Gamble and Wal-Mart. As well as paying the 2.7 per cent a year dividend, you have exposure to emerging markets growth and potential dividend increases that are above inflation. Most spread betting companies offer this and many other SPDR ETF sectors as spread bets going as far as March 2011.
One stock I have been buying (also available as a spread bet) is Mead Johnson Nutrition (NYSE: MJN), which was spun out of Bristol Myers Sqibb (BMY) in February 2009 and owns the Enfamil infant formula that is seeing strong growth in emerging markets including Asia. The shares have been in a very good uptrend, up 89 per cent in fact, but I still see more potential yet.
