Triggers for US defense stocks
The US defence market is expected to experience steady growth in the next few years. Military spending is considered to be the second-largest allocation in the federal budget, after social security. The growing investments in R&D, equipment to support the armed forces and replacing aging equipment are expected to propel the growth in the near future.
The defence industry is considered to be relatively stable. Overall, markets react negatively rather than positively to war but some “war rallies” can occasionally be observed. Those rallies are mainly triggered by 3 main factors in the defence industry:
1) Defence budget and contracts 2) Earnings and valuation 3) Geopolitical events
Military confrontations can have considerable redistributive effects. In particular, certain sectors and firms experience more pronounced boosts because their income might grow as a consequence of a war (Schneider and Troeger). Those triggers are subject to the scale of the news.
Abnormal returns can be observed when terror attacks occur eg: Sept 2001 attacks
Various empirical papers suggest that the impact of terrorism varies across companies in different industries. Overall, terrorism has a positive effect on the stocks involved with defense, security or anti-terrorism products or clients, and a significantly negative effect on that of other companies (Claude Berrebi and Esteban F. Klor)
Defence stocks may be an interesting hedge other than gold or oil in times of conflict. Pay attention to those triggers when holding or buying the below stocks!
Lockheed Martin (LMT) Raytheon Technologies Corp (RTX) General Dynamics (GD) Northrop Grumman (NOC)
Interesting articles:
Impact of War on Stock Markets (FSF,2014)
Terror-Related Events and Stock Returns (Jeven Dew, 2007)
Terrorism activity, investor sentiment, and stock returns (Konstantinos Drakos, 2010)
The Impact of Terrorism on the Defence Industry (Claude Berrebi and Esteban F. Klor, 2008)