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What Will Democrats' Control of House Mean for Defense Stocks?

Our projection for modest growth in the fiscal 2020 defense budget is now on shakier ground.

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The Nov. 6 midterm election results saw the Democrats taking over the U.S. House of Representatives, while the Republicans retained the Senate. House Armed Services Committee ranking member Rep. Adam Smith will now assume the chairmanship, while Rep. Pete Visclosky will take over as defense appropriations subcommittee chairman. We anticipate both will try to ramp up scrutiny of Department of Defense nuclear modernization, specifically the B-21 bomber (Northrop Grumman) and the Columbia submarine (General Dynamics). We also think the duo will increase oversight of overseas contingency operations spending. That said, Smith’s district is in the Puget Sound region, and we believe he will be an advocate for  Boeing’s (BA) programs relative to other priorities.

Our bull case envisions bipartisanship and an avoidance of gridlock, which creates funding certainty for defense names, but our bear case anticipates budget chaos and sequestration for fiscal 2020. Our base case entails a muddle-through in which a 2020 continuing resolution, which freezes funding at the previous year’s levels, occurs but an agreement to avoid budget caps is eventually struck. Flying under investors’ radar is the likely resignation of Defense Secretary James Mattis. Depending on who replaces Mattis and when, we think the Pentagon might be at a disadvantage as it battles for its piece of the fiscal 2020 appropriations.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.