By Lucinda Shen
August 9, 2017

Major stock indexes continue to fall after President Donald Trump’s threat of meeting North Korea with “fire and fury” Tuesday, with the S&P 500 falling another 0.2% during midday trading Wednesday. Yet the potential geopolitical instability was a boon for one segment of the U.S. market: America’s biggest defense contractors.

Out of the five defense companies to receive over $10 billion from the U.S. government in 2016, four rose in value on the stock market Wednesday. Shares of Northrop Grumman climbed by 1% and Lockheed Martin rose 1.5%, while Raytheon jumped 2.3% by midday trading—each hitting an all-time high. General Dynamics also popped 1.4%.

The only company among the country’s five biggest defense contractors not to rise was Boeing, which dipped nearly 1% at least partly due to Wednesday being the stock’s ex-dividend date — the date at which new investors are no longer eligible for Boeing’s quarterly dividend of $1.42 to be paid out September.

Trump’s “fire and fury” warning for North Korea came late Tuesday after reports that Pyongyang had successfully created a missile-ready nuclear weapon. North Korea later threatened to fire missiles at an American military base in Guam.

By Wednesday morning, Trump announced that he would “renovate and modernize our nuclear arsenal.”

That said, the defense contractors’ stock gains were not seen across the wider aerospace and defense industry. While funds tracking the sector outperformed the wider stock market by remaining largely unchanged, Lockheed Martin, Raytheon, General Dynamics, and Northrop Grumman underperformed—suggesting that investors were specifically picking out those stocks with heavy government exposure rather than jumping into the industry at large.

A Tuesday Morgan Stanley note that gave Lockheed Martin and Raytheon the equivalent of a “buy” rating may have also contributed to the pop of those two stocks.

“The optics around a high threat environment that are likely to continue given headlines around North Korea, Russia, the Mideast and so on,” the team led by Rajeev Lalwani wrote in the note. “[Defense] budgets are clearly expanding over the next few years as evidenced by recent traction into 2016/2017.”

Still, experts are largely dismissing the possibility of war between the U.S. and North Korea—as are markets. While world stock indexes including the S&P 500 in the U.S., the FTSE in London, and the Hang Seng Index were all down Wednesday, they were each down by less than 1%.

Defense stocks have already been on a tear since President Trump’s election. Answering to Trump’s promises of increased military spending, stocks in the aerospace and defense industry have popped 39% based on the SPDR S&P 500 Aerospace and Defense exchange-traded fund.

But those promises have yet to pan out. While the House recently approved defense spending of $621.5 billion and the Senate approved $632 billion for 2018, a 2011 budget law caps military and defense spending at $549 billion. To lift the cap, the Republican-dominated Congress will need the support of the Democrats.

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