Playing Defense


Perhaps your evening conversation at the dinner table rarely centers around Carl von Clausewitz.  These days it may not even center around the dinner table.  But Herr Clausewitz might be considered the European equivalent of Sun Tzu.  Should that hint also prove elusive, I will add that both can be considered experts in the art of war.  It was Carl who penned such phrases still in broad use today as “the fog of war” and “the best defense is a good offense.”

As 2012 drew to an end and Congress opted for sequestration as the acceptable means to cut our nation’s spending, dire predictions ran rampant.  The conclusions were rather obvious.  If the government was to be presented with mandatory budget cuts in all departments, then defense spending would take a big hit.  This would, in turn, impact the sales of companies in the defense industry.  Like links in a chain the effect would then lead to shrinking profits followed by declining stock prices.  In fact sequestration would inevitably have a negative effect on just about everything, sending America back into a recession.

Things didn’t turn out that way.  The S&P500, a popular index designed to measure the general performance of U.S. stocks (remember, as a purely mathematical construct, no one can invest directly in any index) rose more than 10% from March of 2013 when sequestration took effect through the end of June.  An index of aerospace and defense was up well over 20% during that same period!

So old Carl nailed it.  An offensive position would have proved more rewarding than defense.  Who would have guessed?  Interestingly, employing relative strength measurements would have kept an investor who owned such a stock invested despite the dire headlines suggesting retreat was the best option in these times.   (by J R)