(New York)

As analysts and the market try to sort out how the new division in Congress will play out in markets, one beneficiary is becoming increasingly clear. Aerospace analyst Ron Epstein of Merrill Lynch had this to say the day before last week’s election, “The change to Democratic control of the House is the best scenario for defense spending. It points to upside in the defense budget. Gridlock keeps budgets intact, and defense is a bipartisan issue”. That argument is a bedrock of the new view that defense stocks are likely going to surge in the new Congressional environment. Epstein points out that aerospace companies are simultaneously seeing commercial and defense businesses growing strongly.

FINSUM: Earnings seem like they will stay in very good shape for the defense sector, and because budget changes look unlikely, the whole industry seems to be in for smooth sailing.

(New York)

One of the best indicators of stock market performance is actually in bonds. Because they trade based on fundamentals, high yield bonds tend to be strong leading indicators of stock performance. With markets swinging all over the place, now might be a good time to see what junk bonds are doing. The answer is that the sector looks to be in good shape, with spreads holding steady and no real sign of concern.

FINSUM: Junk is probably not going to really worry until we get very near, or into an inverted yield curve, as a recession would be rough on the high yield market.

(Houston)

Oil lost big time over the last few weeks and entered a bear market late last week. However, it is surging today as new hope of an OPEC output cut has come to light. Saudi Arabia, the leader of OPEC, says OPEC is willing to consider another round of output cuts as a measure to keep prices high. The last time OPEC agreed to a round of cuts, the market was pulled out of its deep bear market and more than doubled in price.

FINSUM: We used to be skeptical that OPEC could pull off a coordinated cut because of the competing interests of members. But the success it saw last time around means no one should doubt it.

(New York)

Here is a mundane but important question: what is the best single fund to track the whole market? There is now a wealth of options, from Fidelity’s free index tracker all the way to popular, but more costly SPY. The answer to this question is not as straightforward as one might think, as each of the funds has its own characteristics. For instance, while Vanguard’s VTI is popular, it has a quirky structure that can boost unrealized gains. It is also harder to trade without fees. Fidelity’s zero fee index mutual fund is a good choice, but only available on its own platform. Blackrock’s ITOT might be the best choice overall when considering fees, performance, and availability.

FINSUM: For being considered “vanilla”, there certainly are a lot of different flavors of index tracker these days.

(New York)

Advisors have probably started to see some discussion of so-called “opportunity zone” investing. The idea of the concept is to invest in designated “opportunity zones”, which are economically depressed areas, and reap benefits. But the real opportunity is in the tax treatment of such investments. Barron’ sums it up this way, saying “How significant? If you roll the capital gains from the sale of anything—your home, shares of Amazon.com , a Modigliani—into a “qualified opportunity fund,” and hold for 10 years, you get to defer paying capital-gains tax until the end. Then you’re taxed on just 85% of the original investment, and 0% on any money generated by that initial money”.

FINSUM: This is a very good plan for people who don’t need the immediate liquidity associated with some asset sale and want to defer a lot of capital gains. There are several firms that are setting up special funds just for this new purpose.