If US Defense Secretary Chuck Hagel's plan goes through, there will be a lot of cuts for America's military.
In a preview released Monday, the US would shrink the Army down to pre-World War II levels; the current amount of 520,000 soldiers would be reduced by 70,000 and 80,000. As many as 100,000 soldiers could be cut from the Army should sequester continue; the Marine Corps could see a reduction of 15,000 due to sequestration. Decades-old aircraft such as the A-10 (Fairchild-Republic), KC-10 (McDonnell Douglas), and U-2 (Lockheed Martin) will also get retired. However, the plan also calls for $115 billion more than sequestration caps over the next half-decade.
Yet since the budget sequester took effect in March 2013, the S&P Aerospace and Defense index is up over 50%, soundly outperforming the market benchmark S&P 500 index's 22%. According to Steve Cortes, founder of Veracruz TJM, investors remain confident in the future of defense contractor stocks because defense budgets maintain a lot of political support.
"There's no vested interest cutting the defense budgets," says Cortes on CNBC's Street Signs' Talking Numbers segment. "The vast middle wants to continue the corporate welfare. And, this is a chance for the regular investor to shake hands with corporate welfare and buy these stocks."
Carter Worth, Chief Market Technician at Sterne Agee, says a short-term chart of the S&P Aerospace and Defense index is positive but only after a tougher period for those stocks several years ago.
"It's gorgeous; this is as well-defined a trend as one could find in all markets," says Worth of the S&P Aerospace and Defense index's past two years of trading. However, it wasn't always the case, he says.
"If you look at a longer-term chart – the five-year chart," says Worth, "this entire industry group underperformed for three years – 2010, 2011, and 2012."
That's not the case now, believes Worth. "It's got plenty of room to run."
To see the discussion on the S&P Aerospace and Defense index, with Cortes on the fundamentals and Worth on the technicals, watch the video above.
- Politics & Government