Displaying items by tag: defense

(Washington)

Polls have Biden well ahead of President Trump at the moment. In fact, some pollsters say that Biden is further ahead leading up to election day than any candidate in the last 20 years. Markets have somewhat followed this and are clearly anticipating a Biden victory. That said, there is almost nobody who doesn’t think the race will be very close. So, how to play it if Trump surprises the markets and wins? Three sectors seem like they would benefit most strongly: traditional energy companies, defense companies, and large-cap banks. Trump’s light-touch regulatory approach would help energy companies and large banks, while defense spending would probably continue to rise under Trump.

FINSUM: Most agree that if Trump surprises, the market is not going to shoot higher like it did in 2016, primarily because there is not a big proposed tax cut.

(New York)

Because of how the polls are trending, very few seem to be thinking about the fact that a Republican sweep of all three chambers of the government could happen. When you step away from the polls and think about the fact that Republicans currently control two of the three chambers, it becomes more realistic; and even more so when you consider that polls are likely skewed towards Democrats because of “silent” Republican supporters. If the Republicans sweep, or even just if Trump wins, then the sectors that will surge are energy, banks, healthcare, and defense. In particular, think names like Marathon Petroleum, Bank of America, Pfizer, and Northrop Grumman.

FINSUM: This may be unlikely, but it is not as wildly unrealistic as some make it sound. Perhaps smart to have a portion of the portfolio in these sectors headed into the election?

(Washington)

Bernie is a long, long way from the White House. He has not even won his party’s bid. Yet, his odds of winning the Democratic ticket, and thus his effect on markets are growing. The reality is that even if you think Trump is likely to win the election, Bernie is probably going to have a big effect on markets this year because of how tight polls are likely to be. With that in mind, here is some advice to protect your portfolio. Analysts are still working through how Bernie might impact specific sectors, but there is one area where all agree he will be devastating—defense. Bernie favors heavy cuts to the defense budget—a position unique to him among the Democratic field of candidates. Therefore, selling defense companies or buying puts on the defense sector seems smart. Such puts are still quite cheap, so not a bad time to prepare.

FINSUM: If Sanders wins the bid he is going to have a stronger impact on markets every week (provided the polls stay close). Best to start thinking about this now as it may be a theme for the rest of the year.

(New York)

Investors have been playing defense in stocks for months. Everyone has been very spooked by economic data and the trade war, which has caused a rotation into defensive sectors. However, a top manager at Fidelity, Denise Chisholm, is saying the opposite: it is time to play offense. Her core argument is that real interest rates in the US are negative--which happened after the Crisis and also in the 1970s and 1980s—which is highly bullish for the stock market. Further, the ECB and Fed are cutting at the same time, a quite rare occurrence, and one that has always led to an equity market rally.

FINSUM: This is an interesting contrarian argument. We particularly like the ECB + Fed narrative.

(New York)

As analysts and the market try to sort out how the new division in Congress will play out in markets, one beneficiary is becoming increasingly clear. Aerospace analyst Ron Epstein of Merrill Lynch had this to say the day before last week’s election, “The change to Democratic control of the House is the best scenario for defense spending. It points to upside in the defense budget. Gridlock keeps budgets intact, and defense is a bipartisan issue”. That argument is a bedrock of the new view that defense stocks are likely going to surge in the new Congressional environment. Epstein points out that aerospace companies are simultaneously seeing commercial and defense businesses growing strongly.

FINSUM: Earnings seem like they will stay in very good shape for the defense sector, and because budget changes look unlikely, the whole industry seems to be in for smooth sailing.