The U.S. 2014 Midterm Elections held in early November of this year indicate a definite shift in power in favour of the Republican Party. The GOP only needed to gain six seats in order to secure a 51-seat majority in the Senate and thus far have claimed 53 seats compared to the Democrats 44. In addition the House of Representatives election has returned a Republican majority with 244 seats compared to the Democrats 186. This election brings the biggest GOP house majority in 80 years and thus change could be on the horizon. But with the same Democrat president and a new Republican majority Congress at odds for the next two years, how will this all play out for the defense industry?
From an economic perspective a U.S. Congress awash in red means more pro-business policies. Three of the most prominent sectors that might feel the effects of revitalization under Republican majority include energy, financials and industrials. One of America’s largest industries is the defense industry and the GOP has always tended to favour more defense spending from the federal government compared to their Democrat counterparts. For industry leaders like Lockheed and Boeing who rely on government contracts for a large portion of business, a Republican majority is music to their ears.
As of September 2014 defense stocks had already seen a significant increase due to America’s Republican steered response to ISIS, and with a majority in Congress, there is speculation of more to come. Prior to Midterm Elections one of the primary concerns of the Republican party was cuts to the defense budget of more than half a trillion dollars, amounting to 10% of the overall budget. McCain stated that his first goal in September’s Congress was to repeal reductions to the defense budget and now that a majority is present this could actually see traction.
From an international affairs perspective it is also an obvious advantage for the defense industry to have a “pro-military” party majority in Congress. The U.S.-proposed NATO coalition against ISIS militants currently involves 10 NATO member states. With U.S.-led airstrikes in Iraq and Syria already pressing for the involvement of NATO members, further strain is being put on their militaries. This puts even more stress on the importance of replacing aging equipment for governments such as Canada; a process surely favoured by companies like Lockheed and Boeing. All of this was done prior to a Republican majority, with 31% of Democrats opposing action against ISIS compared to only 20% of Republicans.
All said and done, even under an Obama-led America, the U.S. has urged allies to spend more on defense in order to combat international challenges of the day. With a new Republican majority at the helm this could bode well for the defense industry as a collective. Needless to say much of this has been speculation of what the new Congress demographic will bring. There is no accurate method of predicting the outcome of current and future markets, especially when market values will be reflective of the outcomes of international affairs. However time has proven that a Republican majority favours military action as well as spending and with a majority controlling a U.S. congress, changes could happen.