In a few months, the U.S. will inaugurate a new president.
This changing of the guard could bring some big changes to America’s foreign policy. And in 2016, the foremost foreign policy issue is destroying ISIS and stabilizing Iraq and Syria.
It’s imperative that the next president has a solid and actionable plan for the Middle East. Otherwise, many years of intelligence gathering and measured interventions could go to waste.
That possibility seems to be freaking out our current defense leadership.
Defense Contractors: Suspiciously Bullish
In recent weeks, the stocks of many defense contractors have climbed higher. A bunch of them are at or near 52-week highs. It seems like the Pentagon is concerned about its new boss. And it wants to buy as much arsenal as possible before it meets him or her.
Raytheon Company (NYSE:RTN) and Booz Allen Hamilton Holding (NYSE:BAH) are up more than 20% this past year. Lockheed Martin (NYSE: NYSE:LMT) and United Technologies (NYSE: NYSE:UTX) both hit annual highs in the last couple months.
In the case of Lockheed, we can see what caused the recent rally. But it brings up more questions than it answers. Shares have been climbing all summer, after Lockheed smashed second quarter earnings estimates. It surprised analysts by a whopping 13.7%. United Technologies has seen similar performance, beating Q2 estimates by 10.3%.
It’s abundantly clear that defense spending is on the rise in recent months. Why? We don’t quite know. That sort of information is usually classified.
And there’s another indicator that suggests something big is going on in the defense community.
Rumors of a Military Buildup
Recently, reporters caught wind that President Obama has deployed an additional 600 troops to Iraq. They’re going to assist Iraqi forces in retaking Mosul, the largest city under ISIS control.
That brings the total deployment up to 5,000 soldiers in Iraq. Plus an undisclosed number of special operators in Syria.
So let’s put all these things together. We’re seeing a spike in defense spending. Defense contractor stocks have been rallying toward a 52-week high. US-allied local forces are converging on Mosul. And about four months from now, we’ll have new people in the White House.
At Investment U, we’re financial analysts, not military analysts. But these occurrences suggest the Pentagon is preparing for a final push into Iraq and Syria. It wants to go on the offensive and deal a fatal blow to ISIS before the next president is inaugurated.
And if that’s the case, the market effects could be huge.
What Does This Mean for Stocks?
If the U.S. is about to launch a more aggressive intervention in Iraq and Syria, then we should expect the defense contractor rally to continue. Companies like Lockheed Martin Corporation (NYSE:LMT) and General Dynamics (NYSE:GD) may go well above 52-week highs.
If a final boots-on-the-ground push is imminent, it will have two benefits for Americans. First: It will hopefully cause decisive damage to what’s left of ISIS. And second: It will extend and amplify the defense market rally.