Shares of U.S. defense contractor Lockheed Martin (LMT -3.99%) fell 4% on Monday, even as the S&P 500 (^GSPC 0.94%) was up a strong 0.94% on the day.
Lockheed had rallied on Friday when war between Israel and Iran broke out. So, some might be surprised the stock gave back those gains today, given the exchange of bombs and hypersonic missiles over the weekend between the two nations.
However, it appears investors believe the war will be contained or over very quickly, thus leading to a "relief" rally in most stocks but a give-back in defense contractors today.
Fear, uncertainty, and doubt ebbs
Most stocks fell late last week when news of the Israel-Iran war broke out, with defense contractors, oil stocks, and gold stocks rallying over fears of global instability and supply shocks. Israel is a big buyer of U.S. defense contractor equipment, especially Lockheed's F-35 fighter jet and others, and Iran is a major oil and gas producer. Heading into the weekend, some feared Iran would close the Strait of Hormuz, which sits between Iran and Oman and the United Arab Emirates, through which about 20% of the world's oil passes.
However, by Monday morning, The Wall Street Journal reported that Iran was "urgently" seeking to end the hostilities and return to the negotiating table over its nuclear program. Last week, the UN's nuclear watchdog, the International Atomic Energy Agency (IAEA), sanctioned Iran for the first time in 20 years, declaring that Iran wasn't complying with its obligations regarding its nuclear program.
That in turn led Israel to strike Iran's nuclear sites, as well as high-ranking members of Iran's Revolutionary Guard over the weekend. And it appears the strikes were very successful in degrading Iran's capabilities, given that Iran is now seeking a ceasefire.
Image source: Getty Images.
This is what insurance policies are for
Defense contractors and oil and gold stocks can often function as portfolio insurance policies against wars and supply shocks, which can lead to potential worst-case scenarios for the global economy. While these stocks are down today, investors should keep in mind that the conflict isn't resolved, and could re-escalate.
Besides, one would almost hope these stocks underperform, as no one ever "hopes" to have to use an insurance policy, because it means something bad has happened. However, unlike buying insurance, most of these types of stocks pay dividends to investors during peacetime, too.
