The Singapore Summit: Your Investing Takeaway
The news on Tuesday was dominated by President Trump’s summit in Singapore with North Korean dictator Kim Jong-Un. But in addition to the summit, investors also focused on the Federal Reserve’s two-day meeting, which started today. The Fed is expected to announce an interest rate hike tomorrow.
The main stock market indices closed mixed today, as worries about interest rates and trade conflict came back into view.
The U.S.-North Korea summit today gave the White House a chance to pivot from last weekend’s disastrous G7 meeting. The acrimony at G7 was so bad, it prompted International Monetary Fund Managing Director Christine Lagarde to assert Monday that the clouds over the global economy “are getting darker by the day.” Lagarde went on to say:
“The biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating.”
And the Trump-Kim summit? The agreement signed in Singapore with great fanfare by Trump and Kim doesn’t contain firm promises. The pledges to denuclearize the Korean peninsula were symbolic.
But the media circus in Singapore underscores an important point for investors: geopolitical tensions will never go away and they’ll always justify vast military expenditures. That’s a lasting investment opportunity for you.
The $7 billion flight to nowhere…
I learned this truism about military spending from first-hand experience. Pictured here is yours truly, attending a test flight in Stratford, Connecticut of the Boeing-Sikorsky RAH-66 Comanche helicopter. I’ve specialized for many years as an aerospace/defense analyst.
The Comanche, pictured behind me in the photo, was designed to be an armed reconnaissance and attack helicopter.
Many times, I watched the Comanche perform dazzling aerobatic feats over the skies of Sikorsky’s testing facility in Stratford. However, the U.S. Army eventually canceled the program because the collapse of the Soviet Union rendered the machine obsolete.
Designed during the Cold War to help respond to a possible Soviet invasion of Europe, the Comanche was an ever-deepening money pit with bells and whistles that were no longer needed.
But the Army dragged its feet and didn’t cancel the Comanche until it had already spent $7 billion on developing the helicopter — yep, that’s the whopping price tag of the flying prototype that you see sitting on the tarmac. The Comanche never went into full-scale production.
Hence my investment theme for today: the unstoppable money-making momentum of aerospace/defense. Even canceled programs are highly lucrative for OEMs.
The Pentagon brass maintain a firm grip on the congressional purse strings and they always get a disproportionate chunk of the budgetary pie, regardless of the political party in power. That holds true, whether we’re in a bull or bear market, an economic expansion or recession.
Not only will federal budgetary levels for military aerospace remain robust for the foreseeable future, but overseas demand for American-made weapons systems is accelerating. Rising nations in the Asia Pacific region are ordering expensive combat jets and helicopters from U.S.-based aerospace manufacturers.
Of course, sane human beings hate war. But investors must take the world as they find it, not as they want it to be. Regrettably, the world will always be a dangerous place.
The U.S. defense budget represents about 40% of the total global defense budget. Since the terrorist attacks of 9/11, over $9.35 trillion has been allocated to U.S. defense. Is the taxpayer’s money well-spent? That question doesn’t fall under the purview of my column. But the defense budget is only going one way, and that’s up.
President Trump in March signed a $1.3 trillion omnibus budget bill that averted a federal government shutdown and kept Uncle Sam funded until the end of September. The U.S. budget bill boosts 2018 defense spending by $60 billion over last year, for a total of $700 billion.
On the day that Trump signed the bill, the Dow dropped more than 400 points because of escalating trade tensions with China. But as the broader markets fell, major defense stocks soared. It’s a telling dynamic.
As the U.S. economy enters the late stages of recovery, a recession waits around the corner. On average since World War II, economic recoveries have lasted about eight years. The current recovery is in its ninth year. Defense contractors, however, tend to be recession proof.
The benchmark iShares US Aerospace & Defense ETF (ITA) has generated a total return over the past 12 months of 27.46% and year to date of 6.06%, compared to 14.35% and 1.94%, respectively, for the SPDR S&P 500 ETF (SPY).
The climate of perpetual geopolitical fear serves as political justification for ever-bigger defense budgets. Every portfolio should have significant exposure to the aerospace/defense sector, for capital appreciation as well as a hedge against broader market downturns. And that’s your takeaway from today’s reality TV show in Singapore.
Tuesday Market Wrap
- DJIA: -0.01% or -1.58 points to close at 25,320.73
- S&P 500: +0.17% or +4.85 points to close at 2,786.85
- Nasdaq: +0.57% or +43.87 points to close at 7,703.79
Tuesday’s Big Gainers
- RH (NYSE: RH) +30.47%
Specialty retailer beats on earnings.
- Sage Therapeutics (NSDQ: SAGE) +19.62%
Biotech gets green light from FDA for new drug.
- Kadmon Holdings (NYSE: KDMN) +10.30%
Biotech launches public offering of common stock.
Tuesday’s Big Decliners
- Griffon (NYSE: GFF) -11.79%
Building and plastics materials maker faces slowing demand.
- Enzo Biochem (NYSE: ENZ) -8.96%
Biotech reports dismal operating results.
- Jernigan Capital (NYSE: JCAP) -6.21%
Wall Street pans REIT’s stock offering.
Letters to the Editor
“My portfolio is heavily weighted toward blue chips. Is this wise?” — James K.
Spread your money among several asset classes. Don’t just stick to components of the Dow or S&P 500. Diversify your portfolio among value, small-cap, mid-cap, large-cap, growth, and dividend stocks.
Questions about portfolio allocation? Give me a shout: email@example.com
John Persinos is the managing editor at Investing Daily. He also serves as an analyst at the Teal Group, an aerospace/defense consultancy based in Fairfax, Virginia.