Aerospace and defense sector-related exchange traded funds have avoided the brunt of the sell-off in U.S. equities this year.
Year-to-date, the iShares U.S. Aerospace & Defense ETF (BATS: ITA) dipped 1.3% and Invesco Aerospace & Defense ETF (PPA) dropped 1.3%. In comparison, the S&P 500 was down 13.3% so far this year.
Lockheed Martin Corp., Northrop Grumman Corp., and other military gear manufacturers have dodged the worst of the broader stock market’s seven-week rout, outperforming the S&P 500 amid a turn in consumer spending, the Federal Reserve’s hawkish monetary policy outlook, and fears of a potential recession, Bloomberg reports.
Furthermore, the defense sector has strengthened on increased demand in response to Russia’s longer-than-expected war in Ukraine and the growing risks posed by China’s ambitions. Consequently, the ongoing geopolitical risks have fueled support for greater defense spending in the U.S. and Europe.
These geopolitical threats aren’t going away any time soon, so defense contractors can find steady work despite uncertainty elsewhere in the global economy.
“You’re immune from economic shock because the market for defense goods bears no relation to commercial demand for anything in the civil economy,” Richard Aboulafia, a managing director with consultancy AeroDynamic Advisory, told Bloomberg.
While we have seen standouts like Lockheed Martin, which leads the S&P index of aerospace and defense stocks, Boeing Co. has been a major drag on the sector, with its stock price plunging about 37% this year. The largest U.S. aircraft manufacturer has been going through its cash reserves to pay for cost overruns on fixed-price defense contracts, along with an ongoing halt of 787 Dreamliner deliveries and the 737 Max jet’s delayed return to China, Boeing’s largest foreign market.
The reaction to Ukraine’s defense against Russia’s aggression has helped support the defense sales outlook for years to come. About 20 countries have been sending more weapons systems to support Ukraine’s defense and the equipment will need to be replenished. Additionally, defense spending plans among NATO members could increase as well.
“You’ve had a conflict that a lot of people thought initially it’s over in a week or two,” RBC Capital Markets analyst Ken Herbert told Bloomberg. “That’s obviously not happened. I think it’s taken a while for people to fully appreciate and price in how much upside there really is to spending.”
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