Defense Investors Stay Calm Heading for Cliff

Photograph by Kim Jae-Hwan/AFP/Getty Images

US M1A1 Abrams tanks are loaded onto a train during the Army Preposition Stocks operation drill at Camp Carroll in Chilgok, southeast of Seoul.

Defense companies would be hit hardest by automatic government spending cuts set to take effect at midnight, but investors aren’t panicking yet.

Shares of the 10 biggest Pentagon contractors rose 1.2 percent today as Democrats and Republicans remained at odds over a deal to forestall across-the-board spending cuts. The Standard & Poor’s 500 Index rallied 1.7 percent.

If no deal on the spending cuts is reached by midnight, reductions to domestic and national security programs totaling about $110 billion in 2013 will begin this week.

“Investors who are holding large positions in companies like Lockheed Martin and General Dynamics — they realize that even in a sequestration environment these companies are not going away,” said Michael Lewis, managing director of the Silverline Group LLC, a consulting firm in McLean, Virginia.

While the deal being discussed on Capitol Hill would prevent tax hikes on all but the wealthiest households, it wouldn’t achieve what both parties set out to accomplish: sufficient deficit reduction to put the nation on a sustainable fiscal path.

The last-minute proposal is a greatly scaled-down version of a $4 trillion deficit-reduction package President Barack Obama and House Speaker John Boehner previously considered. A Bloomberg Government analysis last month found that it would take a $9 trillion deal to ensure the country’s long-run fiscal soundness amid the demands of an aging population and rising health-care costs.

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