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What Might be in a Portfolio Allocated for a Republican Majority in the House?

Politics
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Image Credit: Gage Skidmore (Flickr)


Republicans Likely to Have the Majority in the House – Investors May Want to Pivot Early

Elections to the U.S. House of Representatives will be held on November 8, 2022. As of today (July 18), Democrats hold a 220-211 advantage in the U.S. House with four vacant seats. All 435 seats are up for election. Should investors reduce their Democrat-era portfolio? It’s four months away, and election forecasters and other statisticians view a return of a Democrat majority as highly unlikely. What industries and companies may benefit if next year Congress is controlled by Republicans?

 

U.S. House Election Odds

Statisticians at Five Thirty-Eight, a subsidiary of ABC News, which Disney owns, updated their models on July 18, ran it 40,000 times, and found the environment isn’t favorable toward House Democrats in the Fall. Their statistics show that the odds are only 13 in 100 that Democrats would retain control of the chamber. Empirically their data demonstrates that even if Republicans lose all seats that are considered toss-ups, along with those that they are expected to lose, the current Democrat majority will be lost.

Investment Implications

The data for the Senate is not as compelling. It shows a 47 in 100 probability of the Democrats being in control of the Senate after the elections. So the focus is not on the full branch of Congress but instead on who gets to set the agenda in the House.

Beginning in 2021, the national agenda changed dramatically. The new President, with a willing Congress, began implementing plans that focused on more open immigration, higher corporate taxes, a U.S. return to the Paris Climate Accord, reduced oil production and distribution, a more pro-union stance, prison reform, and infrastructure spending with a significant focus on shifting to non-fossil fuel energy alternatives.

Throughout 2021 we saw many industries and commodities rise in response to the planned initiatives, many of which can only be implemented with Congress’s approval.

Change brings opportunity and also missed the opportunity.

Whether one’s ideology supports a change or not is usually secondary to investors. Minimizing holdings in positions most likely to lose ground, and within one’s own sense of socially responsible investing, overweighting in positions that may, over time, strengthen is considered prudent.


Below the Radar

One challenge with investing when change may be afoot is not being the last in the door. The statistics I posted above are not a secret; similar results can be found in many trustworthy outlets. So investors know that the energy policies may have to be softened, that money for infrastructure projects may not be as abundant, and rebate money for EVs and other initiatives could also be slower in coming, if at all.

But what about private prisons? Six days after Biden was inaugurated, he signed an executive order to eliminate the use of privately operated criminal detention facilities. Section 2 of this order specifically prohibits renewing any contracts with criminal detention facilities. 


Source: White House Press Release (January 26, 2021)

After the order, the private prison industry shifted gears and focused on the $3 billion market of detaining immigrants. This shift has been positive, and things don’t look as dark for the two largest for-profit prison companies in the U.S., CoreCivic (CXW) and Geo Group (GEO). Each is now making 30% or more of its revenue from U.S. Customs and Immigration (ICE) contracts.


Source:  Koyfin

Since the beginning of 2022, CoreCivic is up 11.2%, and Geo has performed a bit better than the S&P 500 at negative 16.4% (S&P 500, negative 17.7%).

In an SEC filing from November 2021, GEO Group detailed how, despite the loss of $125 million in contracts due to Biden’s executive order, “record increases in migrant flows at the U.S. border have acted as a tailwind” and have more than made up for the profits lost. Would a Republican-led House of Representatives be more likely to add resources to border security and detainment or reduce it? There is very little discussion about this on investing message boards and on financial news networks and other outlets. Yet, the probabilities are lining up on the side of the Republican agenda, which includes beefing up border security and perhaps allocating more funding in that area.

 

Take Away

If the Democrats lose the significant power they now have in the legislative branch, it would seem that the party that takes power would almost have a mandate from the public to make changes to many of the increasingly unpopular moves made over the past year and a half.

These changes are likely to address the growing concern voters have over the border. In March, a Gallup poll showed that 45%, the highest proportion of Americans since 2007, are concerned “a great deal” about the border. That same poll showed 68% of Republicans are concerned “a great deal.” 

A statistical argument can be made that new doors may open for private prison companies, and investors may want to pay attention.

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Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/26/executive-order-reforming-our-incarceration-system-to-eliminate-the-use-of-privately-operated-criminal-detention-facilities/

https://fivethirtyeight.com/about-

https://ballotpedia.org/United_States_House_Republican_Party_primaries,_2022

https://ballotpedia.org/United_States_House_Republican_Party_primaries,_2022

https://projects.fivethirtyeight.com/2022-election-forecast/house/

https://channelchek.com/news-channel/CoreCivic__Inc.__CXW____Biden_Signs_Executive_Order_to_End_Use_of_Private_Prisons_by_BoP

https://www.cnbc.com/2022/07/18/bidens-economic-approval-rating-falls-to-new-low-on-fear-about-inflation-cnbc-survey-finds.html

https://www.opensecrets.org/news/2022/06/private-prison-industry-shifts-focus-to-immigrant-detention-centers-funding-immigration-hawks/

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