On Thursday, I wrote that the sense of impending doom that has forced futures down this morning was nothing new. We have definitely been here before. While the sight of the “leaders” of the World’s largest economic power squabbling like 5 year olds is unedifying to say the least, it is the way the system works, and is at least somewhat predictable if the past is to be believed.
Once again, the most likely scenario is that once enough posturing has been done to satisfy their respective political bases, both sides will give a little and a compromise will be reached. This may not come before the stated “deadline” at midnight tonight, but it will come.
If we accept that that is the probable outcome it is worth reviewing what happened the last time this all came to a head and how the recommended tactics at the time turned out. Does anybody remember the panic over sequestration? At the time, this was seen as something that must be avoided. The mandatory, across the board cuts in government spending would, we were told, cause a collapse of the market, if not the whole system!!!
The cuts were avoidable, unwieldy and in many ways ridiculous, but once again the economy and the markets showed themselves to be remarkably resilient in the face of political stupidity. At the time, I suggested buying what I thought would be the hardest hit stocks, those of defense contractors, on the basis that it would all be forgotten within a couple of months. How did that turn out?
I don’t wish to brag (Who am I kidding, of course I do!) but, if we look at the three stocks mentioned, it turned out pretty well.
Northrop Grumman (NOC)
NOC closed at 56.41 on the day that article was published and stayed under pressure as the “crisis” unfolded. Once it became clear that the end of the world had been averted, NOC climbed to a high of 81.26 (+50.6%) around a week ago. The threat of more government troubles has seen the stock lose around 5% since then.
Different ticker, same story. RTN closed at 56.41 on December 3rd 2012 and then wobbled before starting to rise to a high of 81.26 (+38.7%). Again, the last week has seen the stock drop around 5%.
B/E Aerospace (BEAV)
If you are doubting the logic here, then maybe the third time will be the charm. There wasn’t even any wobble in the case of BEAV, as it soared 60.3% to a high of 75.86. Here too, shutdown concerns have produced a small drop recently.
It must be said that this year has been a good year for stocks in general and that the fading of the fear wasn’t the only factor at play, but the three examples above still easily outperformed the S&P 500 (+22.7%) during the same period, and amply demonstrate the point.
“If you can keep your head while all about you are losing theirs…” is the start of a poem by Rudyard Kipling. He didn’t go on to say “you can make a whole pile of money”, but that is usually true. The financial media (of which I am a part) has the same interest in sensationalism as any other form of news and comment…it is good for business. In the real world, however, governments and economies usually muddle along somehow.
In this case, given that government largesse is what is being threatened, the defense industry, as the biggest recipients of that cash, could again come under the most pressure, but if it does, or if not then even at these levels, stop and think. Do you really believe that, when the shutdown is reversed or averted, a new, wonderful peace will settle over the Middle East, or that the world’s nations will cease to argue and posture? I don’t.
We have been here before and at that time, looking for the hardest hit stocks made sense. It does again now. It may not be defense contractors this time around, or you may have a moral objection to putting your money into that sector, but the basic story is the same. Instead of wasting time worrying about the consequences of a storm in a tea cup, spend it looking for stocks that lose value based solely on the prevalent fear. When you identify them, buy them. Then, absent any other bad news, sit and wait until the fear subsides, then cash in.