Anticipated Surge in Military Funding Post Mid-Term Elections
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The Coming Wave of Defense Expenditure
If you believe that defense budgets are escalating now, brace yourself for an even greater increase next year.
The Democratic Party appears poised for a challenging outcome in the upcoming Congressional mid-term elections. A significant factor contributing to this anticipated result is the alarming rise in inflation, which has more than doubled over the past year, reaching 8.5% in March, up from 4.2% the previous April, as reported by TradingEconomics.com.
Inflation plays a crucial role in the Misery Index, which combines unemployment percentages with inflation rates. An increase in this index during a congressional term usually signals a turnover in leadership. Currently, the low unemployment rate does little to mitigate the economic distress caused by soaring inflation.
Moreover, President Joe Biden's poorly executed withdrawal from Afghanistan has left a lasting impression on many, particularly among those with military ties, who are likely to remember this when casting their votes in November.
Expert Predictions Favor GOP Dominance
Reflecting the prevailing anti-incumbent sentiment, analysts predict a strong possibility of the Republican Party gaining control over both the House of Representatives and the Senate. A report from UBS AG, a Swiss bank, indicates a 74% likelihood of a GOP sweep in the upcoming elections.
The report notes: "The probability of a GOP sweep has increased, but the competitiveness of some elections in November will depend upon the identity of each party's nominees." While individual candidates do influence political outcomes, a 74% chance of a sweep is notably significant.
Challenges Ahead for the White House
Should this prediction hold true, the White House would find itself with limited authority. While President Biden could continue issuing executive orders, any substantial legislation would require Congressional approval.
Despite the general partisan divide, there is one area of consensus: an increase in defense spending. According to the UBS report, "[Defense] spending increases more significantly under this scenario," with both parties agreeing on a more adversarial approach towards China.
Implications for Defense Contractors
If the GOP does secure both houses, defense contractors like General Dynamics (GD) and Northrop Grumman (NOC) are likely to see significant benefits. This shift would also facilitate the U.S. in recovering from the reductions in military spending experienced over the past decade. Data from the World Bank indicates that U.S. military expenditure fell to 3.7% of GDP in 2020 from 4.9% in 2010. In essence, prepare for an intensified focus on military funding.
For those who view investing in individual stocks as too precarious, consider the iShares U.S. Aerospace & Defense (ITA) exchange-traded fund, which offers exposure to a collection of stocks within the defense sector.
This is an adapted version of an article originally published on Forbes.com on April 25, 2022.
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