Defense Stocks: A Bigger Bang For Your Buck

Mounting risk in the stock market prompts me to spotlight a sector that provides outsized investment gains with long-term stability: aerospace/defense. The inexorable rise in global defense spending is a cash cow for investors.

Since the end of World War II, the leading vendor in the global arms bazaar has been the United States, home to the biggest weapons manufacturers. New data this week confirm the status of the U.S. as the world’s top gun.

The three main U.S. stock market indices sharply fell Thursday, as bond yields rose on renewed inflation fears. The Dow Jones Industrial Average dropped by 153.07 points (-0.46%), the S&P by 58.66 points (-1.48%), and the tech-heavy NASDAQ by a whopping 409.03 points (-3.02%). After the opening bell Friday, all three indices were extending their losses. It’s been a roller-coaster week.

As volatility increases, you need protection for your portfolio. Many investors don’t realize that aerospace/defense stocks are suitable for the hedges sleeve of any portfolio.

The military cash machine…

During the early part of my career, as the editor of an aviation publication, I learned how to fly helicopters (it’s an exhilarating experience). I attended the Bell Helicopter Training Academy, based in Fort Worth, Texas. Accordingly, I got to know a lot of military officers and corporate CEOs in the aerospace/defense sector.

By observing first hand how the military-industrial network operates, it became clear to me that military spending is resistant to economic cycles. Financial trends don’t affect line items in the defense budget. The taxpayers foot the bill. Consequently, aerospace/defense stocks offer multiyear growth potential, as well as ballast when market conditions get dicey.

International conflict is likely to increase this year, as Russia, China, North Korea and other antagonists of America test the resolve of the fledgling Biden administration. When the world becomes more dangerous, defense contractors get more money.

President Biden recently put Russian President Vladimir Putin on notice, warning that Putin will pay the consequences for human rights abuses and for meddling in American elections. Biden went so far this week as to call Putin “a killer.” The Russian strongman reacted angrily and recalled his U.S. ambassador. The intensifying Russo-American rivalry will be a driver of defense spending, this year and beyond.

Read This Story: Military Spending: A Sure-Fire Biden Play

According to the latest data from the Stockholm International Peace Research Institute, the U.S. remains the world’s largest arms exporter. From 2016 to 2020, the U.S. accounted for 37% of global arms sales, versus 32% from 2011 to 2015.

See the following chart, published March 18 by the research firm Statista:

During the five-year period ending in 2020, the U.S. supplied arms to 96 countries, 47% of which were in the Middle East. Saudi Arabia was the biggest customer.

Russia remained in second position with a 20% share of the market, despite experiencing a 22% drop in arms exports. While Russia substantially expanded arms transfers to China, Algeria and Egypt, that was not enough to offset a major decline in its sales to India.

Both France and Germany grew their arms exports, coming in third and fourth with 8.2% and 5.5% of the market, respectively. China came in at number five with 5.5% of the market.

The following chart breaks down the U.S. defense budget, from fiscal years 2019 to 2021 and with projections into FY2025:

Worsening geopolitical tensions are fueling the arms boom, but another dynamic is at work: rising energy prices. Many investors are unaware of how there’s a direct link between oil revenue and defense buying.

When the coffers of oil producers are full of cash, producers (especially those in the strife-torn Middle East) recycle those petrodollars into purchases of weapons. The U.S. provides the biggest percentage of those weapons, which means a sizeable chunk of the money that consumers in our country pay for energy comes back to America…which in turn goes to the shareholders of defense firms. Powerful lobbyists make sure that nothing threatens this cozy arrangement.

The ethics of defense spending is not within the purview of this column. Pragmatic investors take the world as it is. As you search for market-beating gains, let your conscience be your guide. But know this: the benchmark SPDR S&P Aerospace & Defense ETF (XAR) has gained 11.34% year to date, compared to 6.13% YTD for the SPDR S&P 500 ETF (SPY), as of market close March 18.

The second Cold War…

Chinese leader Xi Jingping unveiled an aggressive multiyear strategy for guiding China, when the Communist Party-controlled legislature, the National People’s Congress, gathered earlier this month in Beijing. At the top of China’s agenda is continued emphasis on sophisticated military technology.

Xi views the U.S. as China’s number one rival and the autocrat has been challenging U.S. military and commercial interests around the world. Beijing has made it a strategic priority to develop a robust domestic manufacturing base for aerospace/defense, to counter U.S. expertise.

The first high-level talks between the Biden administration and China this week in Alaska descended into bickering, as China took umbrage to U.S. criticism over human rights abuses.

China increased its defense budget in 2020 by 6.6% on a year-over-year basis to 1.27 trillion yuan (US$178 billion). In 2021, the country’s military budget is set to grow by another 6.8% to 1.35 trillion yuan (US$209 billion).

Welcome to Cold War II, a geopolitical climate of perpetual hostility that justifies perpetual spending. That’s why the stocks of aerospace/defense companies, especially those based in the U.S., belong in your portfolio. They confer perpetual profits.

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John Persinos is the editorial director of Investing Daily. He also serves as an analyst with the aerospace/defense consulting firm, The Teal Group. You can reach John at: To subscribe to his video channel, follow this link.