This term refers to the automatic spending cuts imposed by the U.S. government as a result of the Budget Control Act (or BCA) of 2011. The Department of Defense (or DoD) currently faces annual cuts of $50 billion, extending through 2023. As can be expected, sequestration will negatively impact all defense contractors in the U.S.
Republicans have widely opposed these defense cuts and will most likely try to reduce the defense spending limit of the U.S. government. If it’s not successful, it will at least try to push the cuts forward to later years.
The United States is known for ensuring security by constantly preparing for war. Meanwhile, although Democrats may prefer to secure peace where possible, Republicans oppose any sort of arms control. As a result, weapons modernization is likely to gain far stronger support from the GOP.
U.S military actions
One area in which the Obama government has managed to win the support of Republicans is the war being waged against the Islamic State of Iraq and Syria. In fact, many Republicans favor establishing ground operations in the Middle East. The party is expected to push the government to expand its military operations overseas.
This will create new opportunities for the defense sector, especially since funding will not be limited by the BCA. In short, all views of the Republican Party suggest good times ahead for the defense industry.
Defense players affected by this political change include Spirit AeroSystems Holdings, Inc. (SPR), Exelis Inc. (XLS), Boeing Company (BA), and L-3 Communications Holdings, Inc. (LLL). Some of these companies also form part of iShares U.S. Industrials ETF (IYJ).