A post-election rally in defense stocks appears to be winding down as concerns grow that government dysfunction and division could thwart plans for a major spending increase on U.S. troops and military hardware.
Lawmakers still have not approved a fiscal 2017 budget; the easiest solution would be to extend for the full year a continuing resolution that holds funding at 2016 levels, but it would starve funding for new ships, bombers, missiles and helicopters built by companies including Lockheed Martin (LMT +0.3%), Boeing (BA +0.4%), General Dynamics (GD +0.3%), Raytheon (RTN +0.3%) and Northrop Grumman (NOC +0.2%).
During the next six months to a year, the news for defense investors “is more likely to be bad than good, as it becomes clear that the president and Congress will be unable to bring a budget together that significantly increases defense spending," says Bernstein aerospace and defense analyst Douglas Harned.
On the other hand, the average age of the U.S. Air Force aircraft fleet is 27 years, an indicator of the wear and tear on equipment and weapons due to spending curbs and years of war, and why analysts think defense stocks have good growth prospects - eventually.
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