Should you invest in Trump’s defence plans?

Donald Trump wants to increase defence spending by US$54 billion. But does that mean it’s a good time to buy into this sector?

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President Donald Trump speaks while aboard the nuclear aircraft carrier Gerald R. Ford, Thursday, March 2, 2017, at Newport News Shipbuilding in Newport, Va. (AP Photo/Pablo Martinez Monsivais)

Donald Trump is carrying through with his election promise to increase spending in the military. How much? Try US$54 billion. And if there were any doubts, Trump commandeered a new US$13 billion aircraft carrier to let everyone knows he means business.

Of course investors have heard grand promises by governments before. The question investors need to ask is whether this is a good time to put money into companies that align with such grand spending pronouncements? Short answer: Let’s just say that may not be the best strategy.

Consider this. Republican Presidents are seen as being more favourable to the military; Democratic administrations are seen as being more dovish. If that’s true, you might expect defence stocks would do better when Republicans are in power.

Who’s better for defence stocks? Republicans or Democrats

To test this theory we compare the collective performance of four core defence stocks over the past five presidents. Specifically, we selected General Dynamics, Boeing, Raytheon and Northrop Grumman for our analysis because they were the largest members of the defence sub-index and they were some of the few companies that had data going back to the 1980s. For this example we used a balanced portfolio of these four stocks, rebalancing only when a new president took office. (We considered one of several defence sub-indicies, but none had a history longer than 20 years).

It’s a small sample, but as you can see in the chart below an interesting pattern emerges. Defence stocks actually outperformed when President Bill Clinton and President Barack Obama were in office. None of this is to suggest that some defence stocks won’t benefit if the U.S. Congress approves his spending plan, but it may not be the tide to lift all stocks.

It’s worth noting, however, that while these core defence stocks haven’t always been ahead of that market overall, they’ve held their value regardless of who’s living in the White House. While the market cratered at the end of George W. Bush’s time in office, these defence stocks stayed above water.

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