Six Predictions for after the Election

06/15/2010 12:00 pm EST

Focus: MARKETS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Richard Lehmann, editor of Forbes/Lehmann Income Securities Investor, predicts several things that will affect the market after the midterm elections in November.

We see today a world in economic and political turmoil. In the United States, we are entering the political season with the control of Congress in the balance. It will not be pretty, but I am confident that after November 2nd we will all be happy—happy that it is finally over.

Investors need to begin thinking in terms of short-term strategies between now and November, because they may be significantly different from those for the longer term.

Here, then, is our list of predictions and their consequences.

1. The Gulf oil disaster will become the Three Mile Island debacle for the offshore oil and gas industry. New regulations and drilling restrictions will raise the cost of offshore production, which will drive up the cost of oil.

The president also sees the disaster as another reason to pass “cap and trade” legislation. This strained logic will only delay development of a coherent energy policy, so oil prices will remain volatile. Canadian oil and gas producers will be big beneficiaries.

2. The Bush tax cuts will be extended for another two years. This will give rise to a significant stock market rally. More importantly, it will forestall massive profit-taking in the fourth quarter of this year, which promised a windfall of tax revenues for the government.

3. The financial regulation legislation currently being finalized in Congress has added to the depressed stock market. Expect this legislation to pass shortly and only be understood later. It should result in calming the markets, since its negative aspects will only be known down the road.

On the positive side, expect the witch hunt against Goldman Sachs and the major banks to eventually die, since their campaign contributions are very generous.

4. The government will sell a portion of its stake in General Motors. There will be great demand for this stock as it will need to be included in the Standard & Poor’s 500 index, so [the initial public offering] should be oversubscribed. If you hold any GM debt issues, you may have an optimal time to sell these after the stock value has been established, since the debt holders will be getting stock once the bankruptcy has been confirmed.

5. Unemployment is unlikely to improve significantly in the next five months as Congress will continue to extend unemployment benefits at least through November. Hence, additional stimulus spending is likely. There is a slim possibility that this will include a suspension of payroll taxes and minimum wage rules. If so, expect a stock market rally to follow.

6. Markets will also benefit from any perception that the Democrats will lose control of at least the House of Representatives. Markets like divided government, because it means fewer surprises and fewer policy changes. Use any stock rallies in the next five months to raise some cash, since opportunities always come along when market conditions are uncertain.

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