Defense stocks have actually outperformed the S&P 500 since the start of the year, a sign that investors are relatively unconcerned about the effects of the sequester budget cuts on the military-industrial complex.
Compiled by Sober Look, the chart below looks at the year-to-date performance of the S&P 500 (red) against the iShares defense industry ETF (ITA, blue), which is a composite index of defense stocks.
See a difference?
Neither does Tyler Cowen at Marginal Revolution, and the general idea is that investors by and large haven't priced in risk as a result of the implementation of sequestration into the price of defense stocks.
While ITA underperformed the S&P earlier this year — during the uncertainty period — for whatever reason, they are now outpacing the S&P.
This likely means one of two things:
- Investors in defense stocks don't think sequestration will seriously damage the defense industry;
- Or, investors expect that sequestration will be replaced or rolled back at some point in the foreseeable future.
It's also conceivable that it is a little of both.
That reaction is a far cry from the doomsday rhetoric that the White House and the Pentagon have been spouting for the past few weeks, as they warn that the sequester could have long-term consequences on American military readiness.
Read the original post on Sober Look.