The election of Trump has occasioned a stock rally. Defense stocks have gone up based on his promise to “rebuild” the military. And stocks have rallied across the board on the expectation of stimulus spending on infrastructure, repatriation of offshore corporate money and tax cuts. Concerns about inflation, higher interest rates and a pricey dollar have been laid aside for now. But we were recently reminded that some stocks may be at risk despite the Trump stock rally. CNBC quotes Jim Cramer regarding stocks surprisingly at risk under Trump.
While the market continued to roar higher on Tuesday, Jim Cramer couldn’t ignore the cracks starting to appear in the Trump rally, especially for defense stocks.
Donald Trump’s tweet that claimed the cost of Air Force One that Boeing is building to be more than $4 billion caught Cramer’s attention on Tuesday and what it could mean for risk in defense stocks. While the $4 billion figure was unconfirmed, the real issue for Cramer was suasion, or what President Theodore Roosevelt called “bully pulpit.”
Trump may have been upset when the CEO of Boeing discussed the risk to his company if Trump engages in a trade war with China or he may have been sending a message to the entire defense industry that they will be held accountable to costs. A follow-up phone call from the Boeing CEO resulted in all sorts of positive comments. Never-the-less there may be stocks at risk despite the Trump stock rally. Which stocks are these?
U.S. Defense Stocks
We have written in general terms about investing in defense stocks.
The ten largest US defense contractors account for 1 percent of the US domestic economy. Investing in defense stocks means buying stock in giants such as Lockheed Martin, Boeing with its Boeing Defense, Space and Security division, Northrop Grumman Corporation and, General Dynamics. It also can mean buying stock in Raytheon Company, the world’s largest producer of guided missiles or L-3 Communications Holdings, Inc. which provides the likes of NASA, intelligence agencies and the military with command, control, communications, intelligence, surveillance and reconnaissance (C3ISR). Well-known companies such as Honeywell and Hewlett Packard also do defense contract work although, obviously not exclusively.
In 2015 military spending in the U.S.A. was $601 billion. This was about 55% of all federal discretionary spending. Business Insider looked at a breakdown of how the U.S. military spends its billions.
In 2015, the US will have a declared military and defense budget of $601 billion, which is more than the next 7 highest spending countries combined. The vast majority of the $601 billion will be funneled towards the military’s base budget, which includes funding for the procurement of military equipment and the daily operations costs of US bases.
Out of $600 billion $63.5 billion went to research and development and $90.4 billion went to procurement. It is this $153.9 billion that goes to pay defense contractors for things like designing and building the next generation Air Force One. Here is a breakdown of the military budget by investments.
Aircraft related systems: $40 billion
Shipbuilding and maritime systems: $22 billion
Missiles, munitions and missile defense: $17.2 billion
C41 systems: 6.6 billion
Space systems: 5.2 billion
If Trump is able to go through with an upgrade of the US military expect these numbers to go up along with profits for defense contractors. But if Trump picks at the pricing defense contractor profits and stock prices may be at risk.