Coincidence Or Correlation? Defense Stocks Historically Outperform Before Election Day

As the 2016 U.S. presidential election season begins to ramp up, Deutsche Bank believes that now is the time to buy defense stocks. In a new report, analyst Myles Walton discusses the favorable setup for defense stocks ahead of the election.

National security headlines
Typically, awareness of national security-related issues tends to be higher during presidential election seasons. "In nearly every election cycle in the past 20+ years, the defense stocks have outperformed in the year prior to Election Day," Walton explains.

This year, headlines about the Middle East, ISIS, Russia and China should continue to dominate national security news and keep defense stocks at the forefront of traders’ minds.

Budget drivers
In addition to the psychology of the election cycle, Walton believes that the U.S. is currently at the beginning of an upcycle in defense spending. U.S. spending deficits are currently at a seven-year low, recent polls indicate that voters are more enthusiastic about defense spending than they have been since 2002 and the election has provided incentive for politicians to use defense spending as a political tool.

Walton anticipates that the Republican candidates in particular will likely try to incorporate national defense as a major part of their platforms.

Public opinion
Walton points out that public opinion on defense spending is on the upswing, which could serve as a green light for Washington. The previous two major spikes in public desire for defense spending since 1969 were followed my major, multi-year surges in the defense budget.


Stock picks
Deutsche Bank believes that reasonably-valued defense stocks will be a good play for traders at least through the end of 2016. The firm names Buy-rated General Dynamics Corp GD, Hintington Ingalls Industries Inc HII, L-3 Communications Holdings Inc LLL and Northrop Grumman Corp NOC as its top stock picks.