Defense Stocks Are More Than a Recession Haven

Manufacturers of fighter jets, battleships and missiles are usually one of investors’ best defensive havens when economies get shaky. This time around, geopolitical conflict and tension are making them key components in the offensive arsenal as well.

Normally, when a downturn erodes demand or some exogenous shock rocks the market, the US government budget, and particularly spending on the military, tends to remain stable. This makes stocks of companies such as Lockheed Martin Corp., Northrop Grumman Corp. and others attractive when fears of recession increase.

There are some risks, including a president who emphasizes social programs over defense. That’s usually balanced over time by an administration that seeks to build up the military. The pendulum never strays too far from the average defense spending, which has been 3.8% of gross domestic product over the past three decades. This gives defense companies steady, but usually not stellar, sales growth.

That’s changing at a magnitude that likely matches the sudden increase this year in the geopolitical risk profile. The arms orders are pouring in. General Dynamics Corp. announced on Aug. 25 that it would supply 250 Abrams tanks to Poland with a total price tag of about $1.1 billion. Northrop Grumman was contracted in August to bolster US missile defense systems, which could generate $3.3 billion in revenue. Lockheed Martin scooped up a $4.4 billion order in June to supply as many as 255 Black Hawk helicopters, including options, to the US and foreign militaries.