There are certain reactions in the financial market that we’ve come to expect whenever new hostilities break out and ramp up in the Middle East. With the situation in Syria escalating, some of these effects have already been seen. The price of oil rises.Yields on treasury bonds fall as investors move towards safer assets. Riskier assets, like stocks, tend to value in value. People take on a sort of “prevent defense” mindset, not wanting to get beaten. But there’s one group of stocks that tends to be safe from wartime stress: defense contractors.
As the chart above shows, shares of Raytheon Company and Lockheed Martin Corporation, two major defense contractors, have been on a strong upward trend over the last six months, and have done quite well in the last few weeks. They have risen 38 percent and 38 percent, respectively, and are outperforming the Standard & Poor’s 500 by a large margin. For comparison, the S7P 500 has risen 8.59 over the same time period. The chart shows that around May a larger gap began to grow between these defense contractors and the S&P 500. And this divergence is taking place even as defense spending is being cut due to the sequester.
To a degree, the rise in these two stocks is yet another example of investors following the usual playbook surrounding the potential for war. Stocks are bets on the future. And if you think missiles will be flying, why not invest in the companies that make those missiles and their parts? Increased military action increases the demand for these perishable products. Once wars start, the materiel is used up pretty quickly—and then needs to be replaced. That’s certainly what financial bible Barron’s suggests, citing analysts at the brokerage firm Stifel Nicolaus.
Or, is the rise due to something else entirely going on within the underlying business of these companies? After all, the drumbeats for war with Syria have only grown louder in the last few weeks. Investors have to look beyond short-term blips to find prospects for longer-term growth. And both these companies have recently won newly-negotiated defense contracts.
Whether you’re a day-trader or a long-term investor, war, alas, seems to be a pretty good business.