I have already given my investment recommendations for 2013. The most important piece is the permanent portfolio. I have not advocated defense stocks recently, except a small portion that would be part of the stocks held in the permanent portfolio (probably in an index fund or ETF of the broad market).
If you are going to put money into defense stocks, it should be in your speculative portion. It should also be a small amount.
While I wouldn’t bet against defense stocks right now, I also think there are better things to speculate on. If you look at Fidelity’s Select Defense & Aerospace fund (FSDAX), the returns have not been that great. If you take its high point in 2007, the price of the fund is actually less now.
There is no question that if you had money to invest in the year 2000, that putting it in defense stocks would have given you a much better return that the overall stock market. Of course, you would have been much better off in oil stocks or simply buying gold.
Going forward, it would not surprise me to see defense stocks continuing to struggle. Raw materials to build defense equipment could rise in price and cut into profits. And while war rages on, I think that Congress will have to find ways to cut back. While there is a strong defense lobby, it is also easier to cut than Medicare and Social Security. There is a lot of money coming from the defense lobbyists, but not nearly as many votes.
Of course, the word “defense” should be put in quotes most of the time. Much of the expenditures for the military and equipment have little to do with defense. It is mostly to build the American empire with more wars and more occupation, but I digress.
While I don’t expect to see major cuts in government spending right now, I do know that things are getting tighter. Congress is going to have to start looking for ways to make cuts. The Federal Reserve can’t support a one trillion dollar (or more) deficit year after year. It eventually has to stop, which will force spending cuts. Cutting the so-called defense budget will be easier than cutting the so-called entitlement programs. For this reason, I would not bet many chips on defense stocks now.