Is now the time to buy defense stocks?
Over the past year, the prospects of budget cuts in the defense sector have risen in response to the growing national debt level. However, the exact amount of the cuts is uncertain. This uncertainty has weighed on stocks in the defense sector. Could this now be a time to buy these attractive stocks?
- Last August 2, the Budget Control Act of 2011 was signed into law by President Obama. This immediately increased the US debt limit by $400 billion and specified $917 billion of cuts over the next 10 years. Since the “super committee” could not agree on a deal, automatic cuts, including $54 billion from the Pentagon’s 2013 budget, are supposed to be triggered . With the defense budget projected to be $525 billion in 2012, this $54 billion cut would chop off 10.29 percent of its budget.
- Last April Obama proposed $400 billion in defense cuts over the next 12 years through savings from reductions in troops in Iraq and Afghanistan. However, it has been argued that by just holding the Pentagon’s budget at its current levels, $400 billion would be saved in inflation-adjusted terms . In this case, defense spending would decline in relation to GDP, but would remain at the same nominal level.
- When Obama was elected President at the end of 2008, defense sector stocks experienced large sell offs on fears that Obama and the Democrat-controlled Congress would decrease the defense budget significantly. In actuality defense spending increased and defense stocks rallied over 40 percent in just a few months. While it is likely that defense spending will be cut by 3-5 percent annually for the next decade, defense stocks appeared to price in more drastic cuts than this. With a new emphasis on cyber security and international defense spending, defense stocks may be able to weather cuts in US conventional defense spending.
The opinions and forecasts expressed are for informational purposes only and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. The representative does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions.
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- Farrell Jr., Lawrence. Budget Control Act of 2011 Forces Real Cuts to Defense, and Difficult Choices. 1 Sept 2011. National Defense. 11 Oct 2011.
- Mr. Obama’s Defense Cuts. 20 April 2011. The Washington Post. 11 Oct 2011.
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