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Peacenik Presidents Aren't Bad For Defense Stocks

Under which recent President did defense stocks do best (in percentage terms). Surprisngly, the answer is President Jimmy Carter.

It's true that defense spending wound down in the second term of the Nixon-Ford Administration, as the Vietnam War ended. And Carter was elected in part because he was (wrongly) seen as least likely to start another war. And he got off to a good start by setting up the Camp David accords that garnered the Nobel Peace Prize for the Egyptian and Israeli leaders.

But threats multiplied under Carter's pacifistic regime. Not the least of these was the Iranian hostage crisis. And a botched attempt to rescue the hostages almost led to war. Having reached its nadir around the time Carter took office, defense spending crept up in the later years of his regime. And Carter's preceived weakness led to the candidacy of Ronald Reagan, whose nationalistic rhetoric gave defense stocks another boost.

It's true that Reagan's "star wars" spending progam led to the largest increase in defense spending, and defense stocks in DOLLAR terms seen to date. But from an investor's point of view, it is PERCENTAGE gains that count the most. (Think "logs," not straight numbers.) And these took place under Carter.

Similarly, defense stocks are now doing well under pacificistic President Obama. Enthusiasm for them wound down as the popularity of George Bush Jr. and John McCain wound down; surely a Democratic President would see less of a need for defense spending.

But this winding down is just the point: it creates a low base for the next Administration. And threats (e.g. of pirates) are rising in the new Presidential term. Logically, defense spending will rise above what investors earlier thought.

The old saw applies: Sell on rumor, buy on news.

The ultimate irony: President Carter eventually won a Nobel PEACE Prize, and President Obama might well do the same.