In our view, a Republican in the White House will have a very positive effect on the U.S. capital markets. For three years, President Barack Obama has displayed a lack of understanding of what drives economic growth, employment and business confidence. Unemployment has persisted at high levels, and consumers are skittish. Investor confidence is dismal.
A consummate politician, Mr. Obama appears economically tone-deaf and has surrounded himself with advisers who don't understand the nature of economic growth. Sadly, most of his top aides have never worked in the private sector and push left-wing, anti-business social engineering, which historically has led to economic stagnation.
Should the American public elect a Republican president, whomever that candidate may be, it will be an economic game changer.
UNDEPLOYED CASH
Corporate America is sitting on record levels of liquidity, but the cash isn't being deployed to expand business and hire people. Business leaders fear the administration's policies related to taxes, spending, health care costs and other regulations.
The light at the end of the tunnel is that Mr. Obama's re-election chances have diminished greatly over the past several months. The debt ceiling debacle, the downgrade of the nation's triple-A credit rating and the lack of a sound plan for growth, as well as the failure of the supercommittee to reduce spending, have hurt his chances for re-election.
A Republican administration with a pro-growth economic policy of lowering tax rates, cutting government spending and creating a more business-friendly regulatory environment would enhance consumer and business confidence.
To be sure, the market will likely experience increased volatility as the election draws near, but as a Republican front-runner becomes evident and public opinion on the direction of the country solidifies, those marked ups and downs will likely convert into a steady trend upward.
One area in particular where investors may take heart is the amount of cash on companies' balance sheets that is held outside the United States. If a new administration and new Congress can come to an agreement about reducing the tax rate on repatriated foreign earnings, it will benefit large multinational companies that have large amounts of earnings “stuck” overseas.
Companies that would benefit from such an agreement include ConocoPhillips Co., Exxon Mobil Corp., Hewlett-Packard Co., IBM Corp., Microsoft Inc and pharmaceutical giants such as Eli Lilly & Co. and Merck & Co. Inc.
Individual and institutional investors in particular are likely to focus on the opportunities associated with resurgent economic growth spurred by an environment of pro-growth policies. Free-market principles and entrepreneurial spirit, which would likely accompany a Republican administration and Congress, should raise confidence that prosperity can return.
Many leading U.S. corporations are experiencing double-digit earnings growth while sporting near debt-free balance sheets. With the cash rolling in, dividends are being increased dramatically and share buybacks are growing.
Companies that are able to raise their dividends consistently reflect their underlying growth of earnings.
Colgate-Palmolive Co., 3M Co. and Kellogg Co. are companies that have steadily increased their earnings and dividends for years. Others include Lowe's Cos., Republic Services Inc. and VF Corp.
As investor confidence improves, these types of rock-solid companies will do well. Oddly, the shares of many of these companies are selling at historically low valuations.
The cliché “Buy low, sell high” requires that you actually buy low. Now is that time.RECIPE FOR RECOVERY
In my more than 40 years in the investment counsel profession, rarely have I witnessed such well-run companies with great business characteristics selling at such depressed valuations. With the likelihood of an increase in price-earnings ratios, due to rising investor confidence, you have the recipe for a strong stock market going into the 2012 elections cycle.
The engine of economic growth is stuck in neutral due to poor policies coming out of Washington. A new Republican administration that would control spending, enact pro-growth policies and reduce overly burdensome regulations would lead to an improving economy — perhaps not immediately, but over the course of four years.
The stock market would anticipate this happy scenario. Indeed, a change is coming to Washington — a change that we can believe in.
George P. Schwartz is president and chief executive of Schwartz Investment Counsel Inc., a registered investment adviser providing investment counseling to individuals and institutions, including the Schwartz Value Fund and Ave Maria Mutual Funds.
