Clinton’s Message To Market

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

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Judging from the latest findings of American pollsters and the most favorable odds in overseas betting parlors, the political message is unmistakable: Barring something totally unexpected, another member of the Clinton household will be our next president.

That, of course, would mean a Democratic White House. Such an outcome raises significant questions about the investment implications for defense industry stocks, which have outperformed the market and which, it’s widely thought, will fare better under a Republican president than a Democratic leader.

Reader Stanley Kord raises the issue in a message sent via email: “I have big gains on my two defense stocks, Lockheed Martin and General Dynamics, both of which my broker is urging me to sell. His contention is a Democratic White House will mean a lower defense budget than a Republican White House, that government spending under Democrats will swing more heavily in favor of social programs like health care, education, and welfare. How would you address this issue? Are defense stocks a buy or a sale?”

For starters, don’t listen to your broker. That’s the basic message from some pros who continue to be gung-ho on defense stocks, which have beaten the market in six of the last seven years. What’s more, since 2000 defense industry shares have racked up an average overall gain of 141% — more than 15-fold the 9% increase in the S&P 500 during the same period.

“Defense stocks belong in every portfolio; it’s definitely a place you want to be,” money manager Tom Postin of Los Angeles-based P&W Partners says. “We’re at war, global tensions are worsening, the world is becoming a more dangerous place with each passing day, and every voter wants to hear from their favorite presidential candidate that they want America to remain safe and strong. In such an environment, whether a donkey or an elephant winds up in the White House, no one on the campaign trail is going to advocate a reduced defense posture.”

Mr. Postin also views the defense sector as strong protection in an increasingly volatile stock market. “In this kind of market, if you want to be a player, it’s the best kind of bullet-proof vest,” he says.

His top pick is Northrop Grumman ($78.87), the world’s largest shipbuilder, including nuclear submarines, and the third-largest defense contractor behind Lockheed Martin ($101.34) and Boeing ($99.35). “My price target is $100 in the next 18 to 24 months,” he says. He also likes Boeing, which he thinks can climb to $115–$120 over the next 12 months.

Interestingly, past results suggest that this may be an opportune time to buy defense stocks, as buying them in advance of a presidential election has been a wining strategy for more than three decades, according to an analyst at Morgan Stanley, Heidi Wood. Since 1976, there have been eight election years, and the defense sector, she notes, has outperformed the S&P 500 in six of them by an average 20 points. Defense stocks have had a good run in 2007, with an average gain of about 13%, and Ms. Wood says the industry’s solid fundamentals strongly merit owning the group for the next 12 to 18 months. Her top choices are Lockheed, General Dynamics ($81.12), and Raytheon ($62.43).

Addressing possible cuts in the defense budget if a Democrat takes the presidency, Ms. Wood observes that in light of the significant political and cultural challenges ahead for America — such as diminishing prestige on the world stage and the falling dollar — she is hard pressed to construct a credible scenario in which defense expenditures would experience a sharp decline.

In the minds of many people, Republicans are better for defense spending than Democrats, but that is a myth from the Reagan years that is not borne out by the facts, Ms. Wood says. Actually, she points out, over the last 30 years, Democrats historically have spent more on defense, with the figures showing they win by a nose. Under a Democratic White House, the defense budget shows a growth rate of 5.9%, while under a Republican regime that figure is just 5.4%.

Interestingly, when a Republican won the White House in five of the last presidential election years, the defense industry outperformed the S&P 500 by 19%. When a Democrat won, it outperformed the index by 20%.

The bottom line: Whether you think the next president to sleep in the White House will be from the donkey or elephant brigade, it pays to own defense stocks.

Speaking of politics, one prominent city business figure and an active supporter of Senator Clinton’s presidential run tells me that at the moment John Edwards is a leading candidate to be her running mate. Also said to be under consideration are Governor Richardson of New Mexico and Senator Webb of Virginia.


The New York Sun

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