In the face of rising fear and uncertainty, no amount of money seemed too grand when it came to protecting the United States. To the extent that the country feels a bit more confident and secure now that it has eliminated al Qaeda leader Osama bin Laden, the impetus to sustain military spending at current levels may wane a bit at the margins, some analysts say.
The impact of bin Laden’s death on the financial markets will be muted, however. Following the Sunday night announcement of his killing, stocks rose the following morning, but the rally soon fizzled. Oil prices fell slightly, reflecting the view that the risk of a major terror strike that would disrupt energy markets had been reduced.
The economic and financial impact of the terror leader’s demise may be felt months from now, in more subtle ways, if a reduced sense of vulnerability gives policymakers the confidence to reduce defense spending as part of a larger plan to reduce the federal debt. Outgoing defense secretary Robert Gates was surprised in April by the White House plan to cut an additional $400 billion in defense spending by 2023, a cutback that Gates, who has made previous budget cuts had hoped to avoid by making the department more efficient.
Leon Panetta, the CIA director who oversaw the team that killed bin Laden, is taking over the top defense job, and may have the credibility and personal authority to lead deeper cuts in defense spending.
“The killing of bin Laden may actually place additional pressure on defense spending. Ironically, through success, the military victory may facilitate lower resources into the future,” Deutsche Bank analyst Myles Walton said in a note to investors.
Yet that pressure on defense companies will be incremental. “In the end, we’re less concerned about absolute capital loss in defense stocks than we are about under performance given opportunity elsewhere in the market,” said Walton, who focuses on aerospace companies. His only buy is General Dynamics, which he likes because of its “undervalued” Gulfstream business.
Bin Laden’s demise may facilitate the shift away from conventional forces, and strengthen the rationale for smaller, lighter, more mobile forces, an evolution that Gates has supported. “We believe that this development will sustain support for and a continued flow of budget dollars to special forces, special operations, and covert action teams,” Barclays aerospace and defense analyst Joseph Campbell Jr. said in note to investors. The episode also may strengthen support for intelligence operations, which appear to have proven their worth by locating bin Laden. Companies that cater to the intelligence sector may fare better than other defense-related companies.
The raid in Abbottabad may bolster the case for drawing down troops in Afghanistan, on the theory that al Qaeda is a diminished threat and the Taliban is now more likely to negotiate an end to the war. However, renewed concerns about the reliability of Pakistan as a strategic partner to the US could have just the opposite effect on plans for a draw down, according to Campbell.
That is why the impact of bin Laden’s death on defense spending remains “unclear,” Campbell said – just like the course of the conflicts that it supports.
