The Dow Falls 110 as Iraq Fears Don't Boost Boeing, United Technologies

Given unrest in Iraq, you'd expect defense stocks to climb, but they didn't. Find out why.

Jun 12, 2014 at 9:02PM

The Dow Jones Industrials (DJINDICES:^DJI) finished Thursday with their second-straight day of sizable losses, falling nearly 110 points. Most market commentators focused on fighting in Iraq as the primary mover of the Dow and the broader stock market, with fears of rising oil prices and other economic disruptions potentially bringing the five-year-old bull market to an end. But on a day in which military matters dominated the headlines, it's surprising to see that neither Boeing (NYSE:BA) nor United Technologies (NYSE:UTX) was able to post gains, and more broadly, defense stocks fell more dramatically than the market in most cases.

Source: United Technologies.

Part of the reason why defense stocks aren't necessarily poised to gain from trouble in Iraq is that it's far from certain that the U.S. government will commit forces to the region. Having gone to great lengths to withdraw from Iraq as expeditiously as possible, it would mark an about-face for the current administration to intervene once more in the Middle East nation. As election-year rhetoric ramps up, it would take dramatic action to move the needle for major defense-related companies like Boeing and United Technologies.

At the same time, both of the Dow defense components have other battles to fight at the moment. For Boeing, the primary-election loss of House Majority Leader Eric Cantor has been seen as a potential disaster, given Cantor's role in funding the U.S. Export-Import Bank, and allowing some foreign airlines to buy Boeing aircraft. United Technologies is trying to figure out how best to take advantage of rising activity in commercial construction, with its Otis elevator division and its UTC/Carrier HVAC business giving the company exposure in that key sector.

Source: Boeing.

Fortunately, the Dow components are still making progress on several fronts. Boeing reached an agreement with its suppliers in Japan to keep producing some of the essential parts for the new 777X model, with Japanese manufacturers to account for 21% of the major structural components for the aircraft. The 777X will be a vital part of Boeing's overall update strategy, with many airlines around the world clamoring to get the new aircraft as quickly as possible. United Technologies supplies not only Boeing, but also Airbus, with its Pratt & Whitney division building engines for the A380 model.

The Dow Jones Industrials include a number of industries, but defense stocks make up a vital part of the core industrial sector. With Boeing and United Technologies no longer offering pure-play exposure to defense, though, you can expect those two stocks to move independently of defense-related influences as long as their non-defense businesses are performing well.

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