Please ensure Javascript is enabled for purposes of website accessibility

Ukraine War Threat Sends Dow Down 136; Why Aren't Defense Stocks Soaring?

By Dan Caplinger – Mar 3, 2014 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As Ukraine prepares for conflict after Russia moves into the Crimea, the stock market is plunging. But why aren't key defense stocks on the rise? Find out more here.

Monday morning, the Dow Jones Industrials (^DJI 1.26%) responded to news over the weekend about the escalating tension in Ukraine, where Russia has reportedly taken over border posts and moved into Crimea. Investors recognized the potential for the regional conflict to blossom into an event with greater geopolitical ramifications, and in response sent the Dow down 136 points as of 11 a.m. EST. Interestingly, though, shares of key defense-related Dow stocks Boeing (BA 0.66%) and United Technologies (RTX 0.57%) were down almost as much as the overall Dow, and even non-Dow defense companies Lockheed Martin (LMT -0.10%) and Northrop Grumman (NOC 0.16%) were mixed in morning trading.

On one hand, it's natural to assume that the Ukrainian conflict would lead to a heightened state of awareness among government agencies worldwide that deal with national defense. It remains unclear yet how far Moscow is willing to go in its stated mission of protecting Russian nationals against what it sees as an unlawful government in Ukraine's capital of Kiev, and fears of a reformation of the Iron Curtain resonate strongly in the minds of Eastern Europeans.

Yet a couple of factors are likely holding defense stocks back. One is that so far most of the discussion among Western countries has focused on isolating Russia economically, rather than engaging in any sort of armed response to the situation. The diplomatic tone therefore hasn't suggested that companies such as Lockheed, Northrop, and United Tech would be likely to start receiving bigger orders for their products in the near future.

More importantly, though, the lack of response from defense stocks -- especially Boeing and United Tech -- shows just how much progress the companies have made in diversifying away from a shrinking U.S. defense budget. For years, the trend has been toward less defense spending, and the entire industry has responded by turning more toward commercial applications for their products. For Boeing and United Tech in particular, that has led to a substantial reallocation of where they get their revenue, and even more focused defense contractors have sought ways to benefit from other areas. That has helped those stocks minimize losses when defense budgets shrink, but it has also left them with less immediate benefit in times of conflict.

At this point, the lack of response in defense stocks shows skepticism that the Ukraine conflict will escalate further. If it does, though, defense stocks could indeed move up even in an overall down market for the Dow Jones Industrials and other major stock indexes worldwide.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.