Defense stocks climb as Ukraine conflict intensifies

Posted: 28 February 2022 5:36 pm
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Investors in the defense sector could see gains and volatility continue as the war progresses. But these stocks may be in for a solid year regardless of this conflict.

Shares of several aerospace and defense sector stocks climbed Monday and lead the S&P 500 on news that Germany will boost its military spending in response to Russia’s invasion of Ukraine.
Northrop Grumman (NOC) jumped 7% Monday morning, while shares of Raytheon Technologies (RTX) and Lockheed Martin (LMT) climbed 4% and 5%, respectively.
Russia’s invasion last week of Ukraine sent markets reeling, but they quickly rebounded as investors weighed the impact of sanctions on Russia and Russia’s response to them.
Investors in the defense sector may well see more gains in the weeks ahead, but should expect volatility to continue as the war progresses and the world’s response unfolds.

Outlook on defense stocks

While defense stocks were leading the S&P 500 Monday, investors shouldn’t consider to these stocks just because of the current crisis in Ukraine. Gains based on global events can be fleeting.
But over the last year, Raytheon, Lockheed and Northrop were all among the top performers in the S&P 500. In an interview with CNBC Monday afternoon, ERShares COO and chief investment strategist Eva Ados recommended staying with sectors that are working right now, which includes defense, energy and cyber.
Moreover, in general, defense stocks operate in a fairly recession-proof environment and many reward investors with competitive dividend yields. Some experts think a recession could arrive as early as 2023, but defense spending by countries tends to rise from year to year in any environment.
These stocks could be worth holding as the US economy shifts gears in 2022 and 2023.
Investors should also consider the unique issues around investing in the defense sector, including the rising focus on environmental, social and corporate governance (ESG) issues. Because of the nature of products produced by these companies, many investors and funds avoid the defense sector entirely, which can keep downward pressure on these stocks.
For deeper looks at these stocks, read our guides to investing in Northrop Grumman, Raytheon Technologies and Lockheed Martin.

What happened?

German Chancellor Olaf Scholz announced on Sunday that the country’s defense spending will be increased to 2% of gross domestic product (GDP), from an estimated 1.53% in 2021, according to NATO statistics. In 2021, Germany spent around $53 billion euros on defense, which is about $59.7 billion in US dollars. Scholz said $100 billion euros — around $112.2 billion in US dollars — will be earmarked for investments for the army in 2022.
Separately, US Secretary of State Anthony Blinking announced on Saturday that the US would be providing additional military assistance for Ukraine. Blinken said in a statement that he authorized a drawdown of up to $350 million for President Joe Biden to use to provide immediate support to Ukraine’s defense. This brings the total amount the US has provided in security assistance in the past year to more than $1 billion. The package includes lethal defense assistance to help Ukraine protect from the armored, airborne and other threats it’s currently facing.
US weapons makers responded to the weekend’s news, with Northrop Grumman stock climbing more than 7% to a high of $439.23 in the morning hours of Monday’s trading session, while shares of Raytheon Technologies topped $102.30 and Lockheed Martin rose 5% to a high of $431.20.
At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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