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Defense stocks stage rally as Trump discusses defense spending jump

US Tanks
Artur Widak | NurPhoto | Getty Images

The White House wants $54 billion more in defense spending for fiscal 2018 — news that is being well received Monday for investors in major defense stocks.

Lockheed Martin gained about 2 percent, Raytheon rose 0.88 percent and Northrop Grumman advanced 1.45 percent. Boeing gained about 1.1 percent while General Dynamics was up just fractionally.

"With the exception of General Dynamics today, everybody is up between 1 and 2 percent," said Richard Safran, a defense stock analyst at Buckingham Research in New York. "In general, defense stocks move in a herd."

Lockheed has been "a little out of favor" until recently, Safran said, so given it's been an underperformer year-to-date that may help explain why it's slightly higher than many of its peers Monday.

Even before Monday, many of the large defense stocks were already up by double-digit percentages based on expectations for an improved outlook for U.S. defense spending in the administration of President Donald Trump.

"This budget will be a public safety and national security budget," Trump said in remarks Monday at the White House. Trump called it a "historic increase in defense spending to rebuild the depleted military of the United States of America at a time we most need it."

The fiscal 2018 budget would be for the government's next fiscal year starting Oct. 1, 2017. With the additional $54 billion in defense spending, it would represent a nearly 10 percent increase overall for defense to $603 billion.

"It is a good down payment and a very positive signal that will have a very beneficial effect," said Thomas Spoehr, director of the Center for National Defense at the Heritage Foundation in Washington, D.C.

However, some influential lawmakers were quick to criticize the defense spending jump as too little.

"Over the course of the Obama Administration, our military funding was cut 20 percent while the world grew more dangerous," said Rep. Mac Thornberry (R-Texas), chairman of the House Armed Services Committee, in a statement Monday. "While we cannot repair all of the damage done by those cuts in a single year, we can and should do more than this level of funding will allow."

Added Thornberry, "The administration will have to make clear which problems facing our military they are choosing not to fix."

In January, Senate Armed Services Chairman John McCain (R-Ariz.) proposed a $640 billion base defense budget for fiscal 2018. CNBC reached out to McCain for comment.

Trump said the jump in defense spending will be offset by "finding greater savings and efficiencies across the federal government. We're going to do more with less and make the government lean and accountable to the people."

There will be a "large reduction in foreign aid" as well as cuts to "lower priority programs," an official from the Office of Management and Budget was quoted as telling reporters, according to NBC News.

"Just recommending the budget is one thing; Congress still has to figure out how to pay for it with no deal yet agreed to on spending cap relief from the Budget Control Act of 2011," Deutsche Bank analyst Myles Walton said in a research note Monday.

According to Walton, without a change to the BCA caps, U.S. defense spending in fiscal 2018 would be basically flat on a year-over-year basis.

Analysts say the Trump administration also could utilize the so-called Overseas Contingency Operations, or OCO account, to produce increased defense spending. That said, the new OMB Director Mick Mulvaney is known to be a critic of using the OCO account to get around the BCA caps.

"Mulvaney has not been a fan of OCO — the war funding," said Mark Cancian, a senior adviser with the Center for Strategic and International Studies' International Security Program in Washington, D.C. "He has said he wants to offset any defense increases with domestic cuts. But the Democrats have refused to do that."

Even so, putting money in the OCO account was a way the Obama administration got around some of the BCA caps and got Congress to go along with it.

It's unclear at this time if the Trump administration is proposing more money in the OCO account. Yet the increased efforts to defeat ISIS are likely to result in the war funding account going up.

Katherine Blakeley, a research fellow at the nonpartisan Center for Strategic and Budgetary Assessments, said there's "a broad consensus in Congress that the Budget Control Act should be repealed and that the legislature and the executive should be able to think about the needs of our domestic priorities, think about the needs of our defense priorities and square those. So far they've failed to do that."