On Nov 7, Wall Street posted its biggest gains after a midterm election since 1982. As was widely expected, Republicans held on to their Senate majority, even extending it by a slim margin. Meanwhile, Democrats gained a majority in the House of Representatives for the first time in a decade.
A large swathe of market watchers thinks that a gridlocked Congress will be beneficial for U.S. equity markets. One section thinks that this will maintain the status quo, leaving the key Trump administration policy initiatives such as tax cuts and deregulation untouched.
Meanwhile, progress could be made on issues such as higher infrastructure spending. And any further policy moves would be fiscally neutral, meeting the approval of markets. This is why it makes sense to bet on stocks that have surged strongly year to date and are poised to consolidate on these gains in the near future.
Dow, S&P 500 Post Best Gains in 36 Years
On Wednesday, the Dow and S&P 500 both gained 2.1%. Even the embattled Nasdaq increased 2.6% with all three benchmarks closing short of intraday highs. This was the Dow and Nasdaq’s largest single-day increase since Oct 16 while the S&P 500 posted its best session since Oct 25.
More importantly, this post-midterm rally exceeded the average gain which follows such results. According to Goldman Sachs GS, the S&P 500 posts an average gain of 0.7% from a day before such contests till a day after.
These were the largest such gains for the S&P 500 and the Dow since the trading session after the 1982 midterm elections. On that occasion, the blue-chip index and the S&P 500 had increased by 4.3% and 3.9%, respectively.
Gridlocked Congress to Benefit Wall Street?
Traditionally, stocks incur strong gains when a divided Congress is accompanied by a Republican President. According to Bank of America Merrill Lynch, the S&P 500 posts an average annual return of 12% on such occasions. These gains stem from the belief that a gridlocked Congress will help to maintain the status quo.
Since Republicans continued to hold on to their Senate majority, Trump’s tax cuts would survive until the Presidential elections of 2020. At the same time, a divided Congress could prevent the President from announcing further tax cuts which have already created a substantial budget deficit.
Congress could even witness bipartisan progress on higher infrastructure spending. This is one issue Trump has been touting since his election and dovetails neatly into traditional Democratic priorities. Any measure taken on this count would also be largely fiscally neutral.
With the Trump administration focused on increasing defense spending, Pentagon funding would also rise. Democrats have also agreed to raise the defense budget for fiscal year 2019.
Markets have warmly welcomed the announcement of midterm election results. Some market watchers think that this is largely a relief rally, since the results provided no major surprises. However, a gridlocked Congress could serve to maintain the status quo.
This would benefit diverse economic sectors even as spending on defense and infrastructure rises. This is why it makes sense to bet on stocks that have gained year to date and are set to move higher in the near future. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
Amedisys, Inc. AMED provides home health and hospice services throughout the United States to the growing chronic, co-morbid and aging American population.
Amedisys has a VGM Score of A. The company has expected earnings growth of 60.9% for the current year. The Zacks Consensus Estimate for the current year has improved 5.7% over the last 30 days. The stock has gained 112.4% year to date.
Herbalife Nutrition Ltd. HLF develops and sells nutrition solutions to consumers interested in weight management and general wellness.
Herbalife Nutrition has a VGM Score of B. The company’s projected growth rate for the current year is 17.3%. The Zacks Consensus Estimate for the current year has improved 3.6% over the last 30 days. The stock has gained 63% year to date.
Molina Healthcare, Inc. MOH is a multi-state managed care organization participating exclusively in government-sponsored healthcare programs such as the Medicaid program and the State Children's Health Insurance Program (SCHIP), catering to low-income persons.
Molina Healthcare has a VGM Score of B. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved 16.6% over the last 30 days. The stock has gained 62% year to date.
RH RH is a leading luxury retailer in the home furnishing space.
RH has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved 0.1% over the last 30 days. The stock has gained 47% year to date.
Omnicell, Inc. OMCL develops and markets end-to-end automation solutions for medication-use process.
Omnicell has a VGM Score of B. The company’s expected earnings growth for the current year is 53.5%. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 30 days. The stock has gained 43.7% year to date.
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