U.S. defense stocks continue to dominate in 2020, fueled by ongoing tensions with Iran. The eternal threats between the U.S. and Russia/China/North Korea are also keeping defense companies on investors’ radar.
While the tensions between the U.S. and Iran have cooled over the last number of weeks, there is every reason to believe that defense stocks will continue to have an excellent year.
Relations between the U.S. and Iran, which are frosty at the best of times, took a major dive at the start of 2020. On January 3, U.S. forces killed Qasem Soleimani, an Iranian major general.
Mere hours after Soleimani’s death, Iran’s Ayatollah Ali Khamenei vowed revenge. A few days later, Iran fired missiles at U.S. bases in Iraq, which accomplished almost nothing. An embarrassed Iran vowed further retaliation, but it has yet to transpire.
Still, fears of a potential war with Iran and the impact it would have on the Middle East have put U.S. defense stocks in the spotlight.
Tensions have eased a little between the two counties (everyone seems more focused on the coronavirus right now), but it wouldn’t take much for everything to flare up again.
While some have suggested that Iran’s economy is too decimated to fight a war with the U.S., there are other reasons why investors should pay attention to defense stocks.
Vice Admiral Andrew “Woody” Lewis of the U.S. Navy recently said that the east coast of the country is no longer “a safe haven.” (Source: “Admiral Warns America’s East Coast Is No Longer A ‘Safe Haven’ Thanks To Russian Subs,” The Drive, February 4, 2020.)
Lewis said this after the U.S. Navy spent weeks in the North Atlantic Ocean trying to track down a Russian submarine that was trolling around the North American coastline in the fall of 2019.
Despite deploying Navy submarines, ships, and maritime patrol aircraft, the Russian submarine could not be located. It’s reminiscent of the plot of the novel and film The Hunt For Red October. Except in this case, the Russian stealth technology is real.
Speaking of submarines, North Korea claims to be working on a new strategic weapon, which many take to mean a submarine with nuclear capabilities. Trump may have proclaimed in 2018 that North Korea is no longer a nuclear threat, but that statement may have been premature.
President Trump Ramps Up Defense Spending
Regardless, President Trump knows the U.S. has to maintain its position as the world’s economic and military superpower. That’s why he has ramped up military spending.
The 2020 defense budget is $738.0 billion, an increase of about $20.0 billion from 2019. (Source: “Pentagon finally gets its 2020 budget from Congress,” Defense News, December 19, 2019.)
That money will be used to establish the U.S. Space Force and for military hardware such as 98 “F-35” aircraft and eight “F-15EX” aircraft, among other items.
All this might explain why U.S. defense stocks have remained bullish.
Over the last six months (as of February 6), Lockheed Martin Corporation (NYSE:LMT) stock advanced 21%, United Technologies Corporation (NYSE:UTX) advanced 23%, and Raytheon Company (NYSE:RTN) advanced 25%.
During that same period, the S&P 500 only advanced 16%.
Chart courtesy of StockCharts.com
It’s not just the big U.S. defense plays that have made big gains. A large number of smaller defense stocks have also been making serious gains.
The U.S. is the world’s superpower. To maintain that position, the country needs to spend close to a trillion dollars each year on the military.
That’s why U.S. defense stocks are an excellent long-term investing option. Because of the tensions that ebb and flow between different countries, these stocks are also an excellent short-term play.