Saber rattling and a bigger defense budget drive aerospace and defense
The S&P 500 Aerospace and Defense Industry GICS Level 3 Index has risen 33.5% so far this year. Clearly the increase in the US budget for 2018 for defense spending has been a huge plus. The continual back and forth with North Korea also has played into the bullish sentiment as well. But will it continue into 2018? This is one group that fundamentally should continue to perform with President Trump and a Republican Congress. However, the sector is now trading at 21.8x forward EPS, much higher than the 14+ to 17+ multiple it traded at in 2014-2016. Also, the group could start to run into trouble if it looks like Democrats could take back the House and/or the Senate. If you like the trend, Direxion offers the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) (launched 5/3/17) to express that view.
Conclusion: Can the hot sectors stay hot?
No one has a crystal ball that says which sectors will outperform next year. There are schools of thought to stay with what is working, and others that say stay away from last year’s winners or at least take some profits and reallocate. Whatever you do, the market has been a good one in 2017, and you have all the tools from Direxion to make 2018 another winner.
The profitable sector since elections
The aerospace and defense sector has also been the most profitable sector since elections. In his presidential campaign, Donald Trump showed support for the sector and promised to boost military spending by $500 billion–$1 trillion. During the campaign, Trump promised to make a stronger military with 90,000 more army soldiers, 100 more aircraft fighters, a 350-ship navy, and strengthened nuclear and missile defense. In September 2017, a $700 billion defense policy bill for 2018 was approved by the U.S. Senate. Revenue growth has increased in this sector, led by a growing international market for weaponry and demand from developing nations that wish to expand their defense spending. This trend has driven the sector’s performance. The SPDR S&P Aerospace & Defense ETF (XAR) has risen 40% since the elections, compared to the S&P 500’s (SPY)(SPX-INDEX)(IVV) rise of 25%.
Investors can consider the DFEN (Daily Daily Aerospace & Defense 3X Bull), which seeks to magnify the performance of the Dow Jones U.S. Select Aerospace & Defense Index. The index accounts for 95% of the aerospace and defense sector. DFEN has returned 65% year-to-date since its inception on May 3.
Events to watch out for in 2018
As we discussed in this series, out of the three hot sectors in 2017, the information technology and semiconductor industry performed the best. The financial sector was also not far behind, and its performance next year largely depends on Fed rate hikes and the easing of regulations by the Trump administration. Lastly, the aerospace and defense sector has the highest support from the new administration. How the new proposals, defense budget, geopolitical events affect this sector remains to be seen in 2018. Looking at the trend this year, emerging and developing economies also seem to be catching up.
2018 could be marked with some major political events, as the map above from BlackRock shows. So overall sector performance will likely depend on regulatory changes, geopolitical risks, future rate hikes, and the strengthening economy. Either way, Direxion offers investors a wide range of leveraged ETFs for each sector to choose from.