×

This sector looks like a winner regardless of what happens in the election

The defense sector is one group that doesn't appear to care whether a Republican or Democrat wins the White House.

Analytics firm Kensho has found the defense sector outperformed the S&P 500 in the fourth quarter of every presidential election year going back to 1992.


Two key defense companies, Lockheed Martin and United Technologies surged Tuesday after better earnings reports. Both guided for higher-than-expected results for the full year. The companies were down slightly in early trading Wednesday.

Many more defense companies are on tap to report quarterly earnings this week, with General Dynamics, Northrop Grumman and Raytheon among the bigger names. Those reports could help decide whether the bullish theme for defense works this year.

Excluding the period of the financial crisis, the S&P aerospace and defense index has traded positively 100 percent of the time, logging an average return of 7.9 percent. That outperformed the S&P 500 by a wide margin.


A Lockheed Martin F-35 Lightning II fighter during a demonstration flight at the 2016 Farnborough International Airshow.
Marina Lystseva | TASS | Getty Images
A Lockheed Martin F-35 Lightning II fighter during a demonstration flight at the 2016 Farnborough International Airshow.

The S&P has only traded positively 60 percent of the time in the same period, logging an average return of just 1.5 percent. In 2008, the aerospace and defense index was down 18 percent in the fourth quarter, but the S&P fell 28 percent.

The S&P industrials sector also tends to outperform, ending the quarter positively 80 percent of the time with an average return of 3.6 percent.


Logically, some of the bigger names in the space have also been consistent performers during this period. Boeing and General Dynamics have traded positively 100 percent of the time with an average return of 7.6 percent and 10.2 percent, respectively.

Raytheon and United Technologies are also consistently positive, though to a lesser extent, both up 80 percent of the time, logging an average return of 3.8 percent and 7.2 percent, respectively.

So, the aerospace and defense sector already has the election as a tail wind, and that's against a backdrop of rising tensions in an already volatile geopolitical environment.

Conflicts in the Middle East have been driving most of the industry's international sales growth of late, but geopolitical hot spots like Russia, North Korea and the South China Sea have turned for the worse, forcing countries to ramp up military spending. And many analysts think this trend will continue.

Credit Suisse is bullish on the industry, noting defense spending in the United States and the European Union is well below its 20-year average and has finally begun to head north. Globally, a similar story is playing out, defense spending in China has grown by 10 percent and Russia's outlays have ballooned by nearly 50 percent since 2011.

What's more, military budgets in Europe are also beginning to swell. In 2015, 16 NATO members not only put an end to planned cuts, but actually increased their spending, with France and Germany planning to grow their respective military budgets by as much as 12 percent over the next few years.

NATO Secretary-General Jens Stoltenberg supported that, saying, "The forecast for 2016, based on figures from allied nations, indicates that 2016 will be the first year with increased defense spending among European allies for the first time in many, many years."

— CNBC parent NBCUniversal is a minority investor in Kensho.