A Defensive Guide for the Fiscal Cliff
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Some believe the world will end in 2012, others think Congress will make it end in 2013. In a combination of spending cuts and tax increases, Congress created a recipe for economic damage to force themselves to agree on some sort of compromise under the threat of mutually assured destruction. Tax increases would impact almost everyone reading this article and whether you pay federal income taxes or not doesn't matter, your payroll tax cut will be eliminated as well. On the other side, spending cuts will hit across the board and could create a buying opportunity in defense stocks.
Nobody wants this to happen!
It's one of the few issues President Barack Obama and his challenger Mitt Romney agree on. They want to stop these spending cuts and tax increases. But after that, bitter partisan fights begin. With the deadline looming, uncertainty breeds, especially around companies relying on this government spending.
Defense Stocks Under Attack
One of the most talked about parts of the fiscal cliff is the cut to federal defense spending which has arisen in everything from speeches, to debates, to TV ads. Companies like Northrop Grumman, Lockheed Martin, and Boeing (NYSE: BA) all rely on government defense spending for a significant portion of their revenues. Yet the threat of sequestration has not destroyed their stock values. Northrop Grumman and Lockheed Martin are both significantly higher year to date and Boeing is down less than five percent.
Many expect Congress is unlikely to allow the defense cuts to happen and will correct them before they would take place. This expectation has helped to keep defense stocks healthy as they are bolstered by continual defense spending. However, should Congress fail to act, investors could find a good buy in price on these stocks before Congress inevitably restores the spending.
If Congress is locked in a bitter enough dispute and fails to avoid sequestration, defense stocks could take an initial hit on the reduction in expected revenue from government purchases. This would represent an amazing buying opportunity since the cuts are likely to be restored in the long term. Defense spending is popular in both parties as a way of protecting America and bringing money to their home districts. When spending increases again as the cuts are reversed, defense stocks will gain again as the temporary fear of government actually cutting defense spending has subsided.
An Opportunity in a Polarized Congress
Come January of 2013, there will likely be no sequestration, no defense cuts, and no tax increases on the middle class. It would be too politically damaging to allow this to happen. But, if even under the threat of re-entering a recession, Congress still cannot act, defense stocks could take a quick hit when markets open after New Years.
In the long term, defense will still see strong demand in a country that spends more on it than the next ten countries combined. Rest assured, owners of defense stocks will still see their dividends and growth, but a fiscal cliff crash could give the rest of us a great entry point on these stocks.
TulipSpeculator1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.