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Geopolitics Escalate as Investors Seek Refuge in Defense Industry
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In February 2022, Russia invaded Ukraine in a significant escalation to the Russo-Ukrainian War, which began in 2014. Pundits can argue the reasoning behind the war (pro-Russian pundits will say it is to defend against NATO aggression, and pro-Ukrainians will say it’s a land grab), but they cannot argue the devastation that has occurred on both sides of the war. Because Russia has a much larger army then Ukraine, the war initially seemed like a lopsided affair that would end quickly. However, as the three-year anniversary of the latest part of the war nears there is no end in sight.
Ukraine Counterattacks Russia
Along the way there have been a few glimmers of hope for ending the war. Recently, reports emerged that Russian President Vladimir Putin was organizing peace talks to an official end to the conflict. Nevertheless, on Wednesday, the war took a turn for the worse and appeared to be escalating out of control. The New York Times and other mainstream publications are reporting that Ukraine has began an unexpected land invasion of Russia. Thus far, Ukraine has only conducted miner attacks on its adversary, but according to the reports, this is the largest Ukrainian land attack yet.
The stakes couldn’t be higher at this juncture. Historically, land invasions of Russia have ended poorly; just ask Napoleon or Hitler. However, Ukraine has seemingly endless backing from wealthy nations such as the United States and France. Meanwhile, we have not even discussed the escalating conflict between Iran and its proxies and Israel or the terror threats that shut down three massive Taylor Swift concert dates in Austria.
Investors Must Stay Sober
Of course, everyone with a heart wants the world’s conflicts to end peacefully, and without further death or escalation. That said, to be successful on Wall Street, investors must remain cold, calculated, and unbiased. Clearly, several geopolitical conflicts are escalating worldwide. Regardless of whether the conflicts morph into a world war or not, countries like the United States are likely to pour money into defense to be prepared at the very least.
Beyond the catalyst of escalating conflicts, three more reasons to look at the defense sector are below.
Steadiness in a Volatile Market Environment
The volatility index, or VIX, had its largest one-day spike ever on Monday. To survive and successfully navigate a volatile market, investors will often rotate money into low-beta stocks. Beta measures the volatility of a stock compared to the general market. A beta of 1 or more means a stock is more volatile than the market whereas a reading below 1 means it is less volatile (rare). Several defense leaders like Lockheed Martin (LMT), Northrop Grumman ((NOC - Free Report) ), and RTX Corporation (RTX) have a beta beneath 1, which means investors rattled by the recent volatility may seek refuge in the oasis of low-volatility defense names.
Image Source: Zacks Investment Research
Defense Stock Valuations are Cheap
In corrective markets, investors migrate from expensive, high-growth names like Nvidia (NVDA) to cheaper, steadier names. Northrop Grumman and other defense industry juggernauts are currently cheap from a valuation perspective compared to the S&P 500 Index.
Image Source: Zacks Investment Research
Relative Strength and Group Strength
Industry group strength is one of the most telling clues for investors. The Zacks Aerospace – Defense sector has several highly ranked stocks and earns a top 23% industry group rank. Furthermore, while the S&P 500 is down more than 6% for the month, the iShares US Aerospace & Defense ETF (ITA) is up 2.46%.
Bottom Line
The geopolitical environment is escalating as reports emerge that Ukraine has launched a widespread land attack on Russia. With that in mind, investors can seek refuge in defense juggernauts like Northrop Grumman.
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Geopolitics Escalate as Investors Seek Refuge in Defense Industry
In February 2022, Russia invaded Ukraine in a significant escalation to the Russo-Ukrainian War, which began in 2014. Pundits can argue the reasoning behind the war (pro-Russian pundits will say it is to defend against NATO aggression, and pro-Ukrainians will say it’s a land grab), but they cannot argue the devastation that has occurred on both sides of the war. Because Russia has a much larger army then Ukraine, the war initially seemed like a lopsided affair that would end quickly. However, as the three-year anniversary of the latest part of the war nears there is no end in sight.
Ukraine Counterattacks Russia
Along the way there have been a few glimmers of hope for ending the war. Recently, reports emerged that Russian President Vladimir Putin was organizing peace talks to an official end to the conflict. Nevertheless, on Wednesday, the war took a turn for the worse and appeared to be escalating out of control. The New York Times and other mainstream publications are reporting that Ukraine has began an unexpected land invasion of Russia. Thus far, Ukraine has only conducted miner attacks on its adversary, but according to the reports, this is the largest Ukrainian land attack yet.
The stakes couldn’t be higher at this juncture. Historically, land invasions of Russia have ended poorly; just ask Napoleon or Hitler. However, Ukraine has seemingly endless backing from wealthy nations such as the United States and France. Meanwhile, we have not even discussed the escalating conflict between Iran and its proxies and Israel or the terror threats that shut down three massive Taylor Swift concert dates in Austria.
Investors Must Stay Sober
Of course, everyone with a heart wants the world’s conflicts to end peacefully, and without further death or escalation. That said, to be successful on Wall Street, investors must remain cold, calculated, and unbiased. Clearly, several geopolitical conflicts are escalating worldwide. Regardless of whether the conflicts morph into a world war or not, countries like the United States are likely to pour money into defense to be prepared at the very least.
Beyond the catalyst of escalating conflicts, three more reasons to look at the defense sector are below.
Steadiness in a Volatile Market Environment
The volatility index, or VIX, had its largest one-day spike ever on Monday. To survive and successfully navigate a volatile market, investors will often rotate money into low-beta stocks. Beta measures the volatility of a stock compared to the general market. A beta of 1 or more means a stock is more volatile than the market whereas a reading below 1 means it is less volatile (rare). Several defense leaders like Lockheed Martin (LMT), Northrop Grumman ((NOC - Free Report) ), and RTX Corporation (RTX) have a beta beneath 1, which means investors rattled by the recent volatility may seek refuge in the oasis of low-volatility defense names.
Image Source: Zacks Investment Research
Defense Stock Valuations are Cheap
In corrective markets, investors migrate from expensive, high-growth names like Nvidia (NVDA) to cheaper, steadier names. Northrop Grumman and other defense industry juggernauts are currently cheap from a valuation perspective compared to the S&P 500 Index.
Image Source: Zacks Investment Research
Relative Strength and Group Strength
Industry group strength is one of the most telling clues for investors. The Zacks Aerospace – Defense sector has several highly ranked stocks and earns a top 23% industry group rank. Furthermore, while the S&P 500 is down more than 6% for the month, the iShares US Aerospace & Defense ETF (ITA) is up 2.46%.
Bottom Line
The geopolitical environment is escalating as reports emerge that Ukraine has launched a widespread land attack on Russia. With that in mind, investors can seek refuge in defense juggernauts like Northrop Grumman.