Joe Biden has a lead in key swing states, while Democrats in Congress failed to make big gains. That means Pentagon spending will likely remain roughly the same, good news for defense stocks.
Gene Goldman, chief investment officer of Cetera Investment Management, said ahead of the election that talk of 20% cuts to defense spending under Biden were “exaggerated.”
“Defense spending is always a bipartisan issue,” he said. “Both sides want to spend money on defense. To what extent they will that’s a different story but both sides want to spend money on defense.”
Still, defense stocks are largely down so far this year, though they are up in the past few days. Defense industry executives aren’t worried about a drop in spending under Biden.
“I know there is concern that defense spending will go way down if there is a Biden administration. And frankly, I just think that’s ridiculous,” Raytheon CEO Greg Haynes said on Mad Money on CNBC before the election. “Defense has always been a bipartisan issue and when Biden was vice president, and previously a senator, I think he had a pretty good approach to national defense. He understood the need to work both sides of the aisle and to provide for the national defense. “
Biden told the military newspaper Stars and Stripes in September that he would reduce the number of troops in the Middle East, but the defense budget could increase as the focus shifts to Russia and China. Trump has also made bringing troops home from the Middle East a priority.
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Defense Stocks And Technology Investment
“I don’t think (budget cuts) are inevitable, but we need priorities in the budget,” Biden said. Priorities would include investment in advanced weapon systems like unmanned systems, cyber and IT.
“They want to stay competitive with China,” Goldman said of both candidates and noted that China has increased defense spending in recent years.
Boeing (BA) and Northrop Grumman (NOC) are top drone stocks. Lockheed Martin (LMT) is leading the way in developing hypersonic weapons to counter China and is developing a 5G network for the Pentagon. Raytheon Technologies (RTX) is also investing in hypersonic technology.
Goldman expects the Navy will continue to be a priority as China continues its expansion in the South China Sea. That should continue to benefit General Dynamics (GD) and Huntington Ingalls (HII). Biden could scale back investment in Trump’s newly created Space Force, but that remains to be seen.
Boeing shares closed down 1.3% on the stock market today. Northrop rallied 3.55%. Lockheed climbed 2.4%. Raytheon dipped 0.4%.
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Coronavirus Pandemic Shifting Defense Spending
But as the coronavirus pandemic continues to weigh on the economy at home, not everyone in Biden’s party is happy with his approach of keeping defense spending steady.
But no “Blue Wave” swept the House of Representatives or Senate and leaving Progressives within the Democrat Party with little room to fight over defense spending.
“I see a big fight coming,” warned House Armed Services Chair Adam Smith (D-Wash.) in October.
But the Republicans still have control of the Senate and the Dems lost some seats in the House.
“The Democrats House majority lead will shrink which means we won’t see tax hikes, tougher regulation, and massive stimulus spending,” wrote Edward Moya, market analyst at Oanda, in his morning market note.
But like most industries, defense stocks will likely be more impacted by the coronavirus pandemic in the near term, than the presidential election outcome. Defense spending globally is expected to stagnate with overseas governments boosting spending at home to combat the deadly pandemic.
“The scale of government spending on Covid-19 response has the potential to add pressure on global defense spending in the future,” Boeing CEO Dave Calhoun said of the defense business during the Q3 investors call.
He added later: “I don’t think we’re looking at that world through rose-colored glasses. I expect real pressure on that market.”
The dollar rose Wednesday as the presidential election remained undecided. But Moya said that the dollar will still weaken next year as “a split Congress will force the Fed’s hand to do more in the coming months.”
But Goldman said that the weaker dollar and recession will help U.S. defense exports.
“We do believe that the weaker dollar should benefit U.S. exports and industrials,” Goldman said. “The U.S. is the largest arms exporter anyways so a weaker dollar will definitely help.”
He also said that industrial stocks, like defense stocks, do well during recessions and recoveries from them.
Follow Gillian Rich on Twitter @IBD_GRich for defense news and more.
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