• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / U.S. Equity

Government Contractors Have a Big Day

Increase in federal spending is having an effect.
By ROGER ARNOLD Jul 29, 2015 | 04:30 PM EDT
Stocks quotes in this article: BA, LMT, GD, NOC, RTN, SAIC, CACI

It's been a few months since I discussed government contractors. Given their very positive performance today, ahead of the Bureau of Economic Analysis (BEA) release of revised historical GDP figures with the new residual seasonality adjustments applied, and the FOMC meeting results, this is a good time to review the subject again.

I don't know what the BEA is going to announce or how much of the residual seasonality adjustment process will be made public, or how it's going to affect the FOMC decision making, or the Atlanta Fed's GDPNow calculation, or a lot of other factors. It's going to take time to figure all that out.

However, something very interesting is happening today. The stock prices of all seven of the largest government contractors are up today, most dramatically.

In descending order, based on market capitalization, their intraday performance at midday is:

-- Boeing (BA), up 1.6% (part of TheStreet's Trifecta Stocks portfolio)

-- Lockheed Martin (LMT), up 2.9% (part of TheStreet's Dividend Stock Advisor portfolio)

-- General Dynamics (GD), up 4.5%

-- Northrop Grumman (NOC), up 7.4%

-- Raytheon (RTN) up 3.8%

-- Science Applications International (SAIC) up 0.3%

-- CACI International (CACI), up 1.4%

With the exception of SAIC, this performance is also much better than the Dow Jones Transportation Average increase of 1.1% today. The transports had been underperforming the industrials until about a month ago, leading to speculation that the industrials would decline further, as I discussed a few months ago.

Within the past month, however, the transports have outperformed the industrials in the positive direction at 3.5% vs. 0.6%, and for the time being relieved the associated pressure on the contactors.

The reason for this aggressive performance of the contractors today, just before the release of a lot of economic data, is so interesting is that the consensus expectation has been that the adjustments made to GDP would result in upward revisions to average annual rates of growth, especially for 2014 and 2015.

If that is to occur, the logical consequence of such should be that the economy is performing better than the previous GDP estimates implied and the pressure to offset the trend toward recession with a fiscal response of increased government spending should be lessened.

I wrote about the potential for the government contractors to perform well due to the increasing potential for an increase in countercyclical government spending last April in the column, "Government Contractors' Windfall Ahead."

Since then, however, the very poor performance of the first-quarter GDP -- which all of the most prominent economists missed on, while the Atlanta Fed's GDPNow estimate got almost right -- blew up into the debate about "residual seasonality."

That group of prominent economists included the FOMC members, and following the release of first-quarter GDP figures by the BEA, the conflicts among Fed staff economists, the FOMC members and the BEA economists were more prominently exposed to the public, vs. the traditional fraternal and nonpublic relationships between them.

The reason for offering everything above is that there have been a lot of conflicting market and economic signals concerning the potential performance of the contractors.

Ultimately, however, the contractor's long-term potential and performance are tied directly to government spending, and an increase in government spending is tied to the political will necessary for it to be passed by Congress, which to a great degree is determined by the perception of strength in the private sector of the U.S. economy.

The performance of the contractors today is implying that speculators believe the adjustments to GDP that will be announced by the BEA will not be as indicative of a positive economic trajectory as those advocating the need for "residual seasonality" adjustments had suggested a few months ago. It appears the markets are beginning to reflect an understanding of that issue.

As it stands now, I am still of the opinion that the economy is going to greatly underperform expectations and that a fiscal response to that situation will be forthcoming with bipartisan support for an increase in government spending this fall.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Arnold had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

More from U.S. Equity

Jim Cramer: 3 Big Takeaways for Investors From Bank Earnings Calls

Jim Cramer
Jan 19, 2021 7:00 AM EST

The consumer continues to de-leverage at an extraordinary pace -- and the ramifications of this are extraordinary.

Wednesday's Woe, Biden's Plan, U.S. Dollar, J&J Vaccine, Trading Intel

Stephen Guilfoyle
Jan 14, 2021 7:22 AM EST

We are going to live again. You will dance in the aisle at some concert whose performer I have never heard of, and you will cheer for your favorite team in person again.

Federal Realty: Undervalued Dividend King With a High Yield

Bob Ciura
Jan 13, 2021 1:17 PM EST

There is a reason that there are just 30 Dividend Kings in the market.

Amid New Market Highs, Psychology and Valuation Warnings

Guy Ortmann
Jan 13, 2021 11:30 AM EST

Eager crowd buyers juxtaposed with actively selling insiders always raises a yellow flag.

Stock-Picking Becomes More Important in This Market Environment

Guy Ortmann
Jan 12, 2021 10:21 AM EST

All psychology data are now flashing caution signals.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I'll discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login