What happened
At approximately 10 p.m. ET last night, Russian military forces attacked neighboring Ukraine and a full-scale invasion is now in progress. Russian stocks are plummeting -- but not only Russian stocks. In particular, three big U.S. industrial giants -- two of which are also major defense contractors -- are trading lower today as well.
As of 11:50 a.m. ET:
- Ingersoll Rand (IR -0.26%) is down 2.7%.
- Boeing (BA 0.41%) is also going down -- 2.9%.
- And General Electric (GE 0.89%) is suffering most of all -- down 4.3%.
So what
But does this make sense? On the one hand, yes, a war between Russia and Ukraine is likely to seriously impact cross-border commercial sales of Ingersoll, Boeing, and GE products into both countries. If Western governments levy tough economic sanctions against Russia to punish its invasion, the interruption in commerce could be even more severe.
The economic impact could even be felt outside of Eastern Europe, if war there depresses travel demand elsewhere in Europe, for example. This could impact demand for Boeing airplanes by airlines, for General Electric's airplane engines to power them, and for certain Ingersoll Rand aerospace products as well -- flow control technologies used in testing new airplane designs, for example.
To this extent, the declines in stock price at Boeing, GE, and Ingersoll make some sense.
Image source: Getty Images.
Now what
But realistically, war, and the heightened perception of the threat of future wars, can also be very good for industrial businesses such as Boeing, GE, and Ingersoll Rand.
In the best possible scenario, a quick end to the war in Ukraine will still leave the country in ruins and in need of suppliers to help rebuild the manufacturing base and replace destroyed power plants, airplanes, and other industrial infrastructure. These three industrial giants will all be well positioned to help out with that.
In a worse, and I fear more realistic scenario in which the conflict drags out or even expands, the danger posed to Europe by an aggressive Russia is likely to increase demand for military hardware among nations on the Eastern front in particular. Already, for example, leading experts in the military sphere such as the Sagamore Institute's Jerry Hendrix are calling for NATO countries to commit to spending 4% of their gross domestic product to rebuild their depleted militaries, on the theory that a strong defense is the best means of deterring future wars.
When you consider that most countries in NATO today (with the notable exception of those bordering on Russia or Ukraine) currently spend less than 2%, and some as little as 1% of GDP on defense, I think it's more likely than not that we'll see significant increases in defense spending over the coming months and years. This creates the potential for big increases in the defense businesses of both Boeing and General Electric (and to a lesser extent, Ingersoll as well).
Accordingly -- and in contrast to most investors today, it seems -- I see a whole lot more reason for defense stocks like Boeing and GE to be going up today, and not down.
