The Dow Jones Industrials (DJINDICES: ^DJI ) finished the week on a losing note, falling 140 points on Friday and ending with a weekly loss of about a third of a percent. Along with the onslaught of earnings results announced today, many market commentators blamed the increasing chance of armed conflict between Ukraine and Russia as justifying the market's drop. But if that were the case, you'd expect to see defense stocks rise -- yet neither United Technologies (NYSE: UTX ) nor Boeing (NYSE: BA ) managed to gain ground on the day despite their defense-industry ties, and purer-play defense stocks also posted losses today. Why weren't defense stocks the right play for fears of war?
The peace dividend and your investments
The problem with this line of thinking is that investors want the best of both worlds. On one hand, when it became clear that defense spending would be on a downward trajectory over the long run, Boeing and United Technologies did an especially good job of diversifying their businesses and emphasizing the non-defense areas of their respective conglomerates. Boeing, in particular, reemphasized the importance of its commercial aircraft division, spending billions on research and development in order to come out with new models of aircraft that were more fuel-efficient and represented good value for airlines seeking to update and expand their fleets. United Technologies has not only grown its own aerospace exposure accordingly in order to accommodate the rising demand for aircraft, but it also has continued looking to its Otis elevator division and its UTC Building & Industrial Systems business for growth in the commercial economy.
That doesn't mean that United Technologies and Boeing get nothing from their military businesses. Boeing has worked hard on fighters that it hopes can supplant rival offerings and move forward as the state-of-the-art aircraft for U.S. armed forces in multiple branches of the military. United Technologies' Sikorsky helicopter business is poised to grow from sales from around the world. But defense no longer represents the top opportunity for either Boeing or United Technologies.
Moreover, investors appear skeptical that Russia will actually follow through on its threats to take further action in Ukraine. One can explain away the situation in Crimea as having been distinct from what's happening on the mainland, although the same mix of ethnic Russians living in Ukrainian territory give Russia the same excuse to exercise its power over the eastern part of Ukraine. Yet, with Europe economically dependent on Russia for energy, and with the U.S. weary of war, investors in defense stocks are trying to avoid getting head-faked by unrealistic expectations of how quickly the U.S. would come to Ukraine's aid if a Russian invasion took place.
If the situation in Ukraine continues to worsen, there will come a time when investing in defense stocks will make sense. But we're not there yet, and that's why the components of the Dow Jones Industrials that have defense exposure aren't soaring today.
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