Defense Stocks Hold Line After Obama Spending Cuts

Includes: BA, GD, LMT, RTN
by: Market Blog

By David Berman

Investors are taking in stride the deep cuts in U.S. military spending proposed by President Barack Obama on Thursday. The S&P 500 aerospace and defense industry group of 12 stocks was down 0.7 per cent in late afternoon trading, putting the group about a percentage point behind the benchmark index.

However, Boeing Co. (NYSE:BA), General Dynamics (NYSE:GD), Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN) were down more than 1 per cent each.

The reaction could have been a lot worse, of course. The Obama administration announced military cuts of $487-billion over the next decade as it strives to balance the need for widespread spending cutbacks against the need for military preparedness.

In his speech, Mr. Obama appeared to hit the right notes, suggesting that a leaner military doesn’t mean weak: “Our military will be leaner, but the world must know the United States is going to maintain our military superiority with armed forces that are agile, flexible and ready for the full range of contingencies and threats,” he said.

Despite the market’s collective shrug over the cutbacks, they deliver a bookend to what had been more than a decade of strong performance by aerospace and defense stocks. Since the terrorist attacks on Sept. 11, 2001, the industry group has delivered total returns of 159 per cent, or more than three-times the gains by the broader S&P 500 over the same period (after factoring in dividends).

If those gains coincided with rising military spending, backed up by two major wars, it will be interesting to see what relative peace and lower spending does to the group over the next 10 years.

Disclosure: None