Among the biggest drivers of this jump is United Technologies, which has surged nearly 8 percent (as of 9/24/18) since it reported solid Q2 earnings late in July. UTX is also rapidly nearing its $30 billion acquisition of Rockwell Collins following some divestments in conflicting areas of its business.
Others in the space like Boeing and Lockheed Martin have also climbed about 10 percent in the past month after finalizing some sizable agreements with Uncle Sam. Boeing’s up following the announcement of a $2.9 billion defense contract while Lockheed Martin rose on news on a massive $7.2 billion contract to develop a next generation GPS.
As you can probably tell by now, the best thing the industry has going for it is a government willing to make these multi-billion dollar deals. Prior to the recent late-summer rally, both companies traded down more than 10 percent from their 2018 high. On top of that, others in the industry like Northrop Grumman and General Dynamics traded at or near 52-week lows through much of the third quarter.
It’s clear that the biggest catalyst for this industry is the people’s checkbook. Since the Senate just approved a $17 billion increase to the pentagon’s budget, there’s not much reason to expect these companies to get kicked off the dole anytime soon.
However, depending on whether the less hawkish Democrats manage to flip the legislature this November — the prospect alone could cause some traders to shift some of their exposure — there’s a chance the Trump administration might see greater resistance to further spending if there’s a return of deficit hawks in congress.
If defense spending does get the axe, orders in Boeing’s international aeronautics business stand to buoy that company. However, research from McKinsey & Company shows U.S. defense spending is heavily correlated with the revenue of defense contractors, so stragglers like Northrop or Lockheed could be harder hit without a steady stream of federal contracts and a potentially tighter fiscal outlook.
For now, the lack of overexposure to international markets is a boon for defense stocks. However, if and when U.S. monetary policy really starts to tug on national purse strings, the contractors could start feeling the pinch.
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DUSL Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in the securities of the Industrials Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Industrials Select Sector Index (IXITR) – Provided by S&P Dow Jones Indices and includes domestic companies from the industrials sector which includes the following industries: aerospace and defense: industry conglomerates; and machinery. One cannot directly invest in an index.
DFEN Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in the securities of the Aerospace and Defense Industry and the Industrials Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Dow Jones U.S. Select Aerospace & Defense Index (DJSASDT) – Provided by Dow Jones U.S. Index (the “Index Provider”). The Index attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. The Index Provider selects the stocks comprising the Index from the aerospace and defense sector on the basis of the float-adjusted, market capitalization-weight of each constituent. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts. Defense companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons. One cannot directly invest in an index.
