Defense Stocks Love The Donald

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In late March, as the GOP nomination was in doubt, the ITA defense sector ETF was up 12.3% from the February lows, while the S&P 500 SPY was 15.5% higher.  That’s 320bps (3.2%) of underperformance for the defense sector.

Today, the S&P is 17.8% above the lows, while defense stocks have surged 20.3%.  Bottom line, defense related equities have substantially outperformed the S&P 500 over the last 45 days.


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From the moment Ted Cruz and John Kasich dropped out of the race, defense stocks have outperformed the broad stock market.  Someone is pricing in a Trump Presidency.

Even more telling, volume found in the ITA ETF above:

Pre-Trump Nomination Secured: 26k shares a day

Post Trump Nomination Secured: 103k shares a day

“I’m gonna build a military that’s gonna be much stronger than it is right now, It’s gonna be so strong, nobody’s gonna mess with us. “

Donald Trump, said on Meet the Press, in March

The Defense Department budget for 2016 is $575 billion. President Barack Obama’s 2017 proposal increased it to $583 billion. By comparison, China spent around $145 billion and Russia around $40 billion in 2015…..

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Great Rotation

Join our Larry McDonald on CNBC’s Fast Money, Wednesday May 18, at 5pm.

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Two years ago Wall St. started lecturing us on the “great rotation.”

They confidently said the Federal Reserve would hike rates seven times in 2015 and 16.  Their target of the US 10 year yield by the end of 2016 was 3.50% vs 1.70% today.

“It’s time to get ready for life after liftoff.”

The argument went, you must take down your exposure to bonds and add to stock holding as this historic rotation takes place, two year later we’re still waiting:

2016 Inflows vs Outflows (ETFs and Mutual Funds)

Bonds: +$53B

Stocks: -$85B

Bloomberg, IIF data

Last year, we told them they were wrong here.

When you see and hear this kind of “group think” from sell side analysts, run don’t walk the other way.

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