Don’t mistake politics for business

The sky’s been falling in Dee Cee for a while now.  We’ve been sequestered, jumped over the fiscal cliff, shut down, debt ceilinged, Obamacared and so on.  Interestingly, all of this political woe really hasn’t mattered much on Wall Street.  In fact, just the opposite is true.

When talk of lower government spending turns toward the possibility of the Federal Reserve backing away from its $85 billion in monthly bond purchases, it sends shudders through the markets.  Businesses benefit from low interest rates.  Government spending creates jobs helping to drive consumer spending.  Though politically unpopular, this is apparently the new normal for economic stability.

The irony is that what makes sense personally is often different from what makes sense politically.  Neither our pocketbooks nor our politics follow the same calculus as business profits.

Equating politics and business should lead to the conclusion that the sky has been falling both in Dee Cee and on Wall Street, something that clearly hasn’t been happening.  The S&P 500 and the Dow Jones industrial average have been hitting record highs in recent months.  Going back over two years, a time before sequestration, the S&P 500 has risen more than 40 percent — not a bad return for 24 months, during a time when many have assumed that political instability should imply economic uncertainty.

Looking at Virginia’s 15 largest public companies between November 2011 and November 2013, only one of them dropped in share price, and the unweighted average share price gain for the group was about 40 percent, roughly even with the S&P 500.

Of special note is Smithfield Foods, which exited the ranks of Virginia’s public companies in September after being bought by Shuanghui International Holdings Ltd.  Nevertheless, Smithfield’s stock rose over 50 percent during its last two years of public trading.

Shares of Leidos Holdings Inc. are a bit more complicated.  The company formerly known as SAIC underwent a spin-off and 1-to-4 reverse stock split in September.  Accounting for the split and adding back the spinoff, the pro forma combined Leidos/SAIC price per share has gone up a bit over 50 percent in the past 24 months.

Alpha Natural Resources the only company in Virginia’s top 15 to decline in value over the past two years, plummeted by 70 percent.  Increased environmental regulation, lower foreign demand for metallurgical coal and an increased supply of lower priced shale gas have combined to dampen share prices across the entire coal sector.

Genworth’s share price gain of 100 percent over the past two years makes it the leader among Virginia’s top 15 public companies.  New CEO Tom McInerney shelved a planned IPO for the company’s Australian mortgage insurer and cut costs. At the same time the company has benefited from increasing pricing power for long-term care insurance and a recovery in the U.S. mortgage insurance market.

Similarly, Northrop Grumman has seen it’s share price rise by more than 90 percent since last 2011.  No doubt, sequestration has been difficult, but it hasn’t done much to impair the value of this company or for that matter any of the largest government contractors in Virginia.

This brings me back to politics and business.  Despite ongoing saber rattling about government bond ratings, confidence in markets, and the reputation of our democracy, business seems to be doing okay.  The Great Recession officially ended in June 2009. Recessions are defined by economic measures, not political ones.  Though the U.S. political environment remains embarrassingly choked by partisanship, business earnings continue to improve and opportunities exist for those willing to seize them.

As mentioned, low interest rates are good for business.  A recent Bloomberg News article on cable-magnate John Malone quoted him as saying, “A combination of cheap money and a gloomy view of the future gives rise to opportunity for those who aren’t quite so gloomy.”  That’s’ a pretty good description of what opportunity looks like these days.  It’s something that can be missed by clinging to a pessimistic view of business conditions.

Economic ups and downs tend to run in about 10-year cycles.  With the last recession ending in mid-2009, we are somewhere around half-way to the next peak.  Looking at the recent results of Virginia’s top companies, things are better than they seem.  As we approach 2014 politics may continue to disappoint, but business is doing just fine.