Al Root
President-elect Donald Trump's decision to nominate Fox News contributor and veteran Pete Hegseth as Secretary of Defense caught Wall Street off guard.
For investors, the pick creates some near-term uncertainty, but the direction of U.S. defense spending will matter more in the long run.
Wall Street analysts responded with a mix of surprise, uncertainty, and concern.
"Pete who?" wrote Vertical Research Partners analyst Rob Stallard in a Wednesday report, adding that the unknown "creates uncertainty which is never good for stocks."
Hegseth is an author, veteran's advocate, and presenter on Fox News. He achieved the rank of Major in the Army National Guard, seeing active service in Iraq and Afghanistan. In terms of policy, he's been hawkish on Iran and criticized NATO.
Historically, defense secretaries have had varying backgrounds, including military service, Wall Street, business, and politics. The issue for Wall Street doesn't appear to be his background, but that no one saw the pick coming.
The "pick was definitely not on our Bingo card....nothing short of a head-scratcher," Wolfe Research analyst Myles Walton wrote.
The Republican-controlled Senate will have to confirm Hegseth. If approved, he will be responsible for submitting the defense budget for approval.
"Pete is tough, smart, and a true believer in America first," said Trump in a news release. "With Pete at the helm, America's enemies are on notice."
Analysts struggled to predict what the nomination would mean.
"It's hard to judge the level of instability and change that a pick like Hegseth could insert into DoD [Department of Defense] priorities, policies, personnel, and spending, but this is a pick that definitely adds uncertainty to the DoD's direction of travel," Walton wrote.
The analyst also highlighted concerns about Trump's reported "Warrior Review Board" proposal. According to The Wall Street Journal, it would force 3- and 4-star generals and admirals deemed "unfit for leadership" to retire.
Such a board "raises question about where decision-making checks and balances might be heading," Walton wrote, adding that it would bypass the Pentagon's normal promotion process.
In Trump's first presidential term, the turnover of defense secretaries was high by historical standards. He had two defense secretaries -- James Mattis and Mark Esper -- and three "acting" secretaries. The current Defense Secretary Lloyd Austin has served since 2021.
AeroDynamic Advisory managing director Richard Aboulafia echoed Wall Street's uncertainty.
Hegselt is "a culture warrior," he wrote. "I'm not sure what he stands for with strategy, weapons development, force structure, or anything beyond [military] culture."
Investors don't like uncertainy, but defense stocks are taking the news in stride.
"From a high-level preliminary perspective, defense tech stocks should maintain their momentum following the election of President Trump and the likelihood of a congressional Republican sweep," wrote William Blair analyst Louie DiPalma in a Wednesday report. He still expects the defense budget to increase at "low-single-digit" percentage rates in the coming years, in line with Biden-era increases.
Shares of large defense contractors Lockheed Martin, Northrop Grumman, L3Harris Technologies, and General Dynamics were down less than 0.3%, on average, in early Wednesday trading while the S&P 500 and Dow Jones Industrial Average were up 0.1%.
The iShares U.S. Aerospace& Defense ETF was unchanged. The ETF has gained about 6% since the Nov. 5 election.
Coming into Wednesday's trading, shares of the four contractors were up about 21% year to date. The Defefense ETF was up about 23%.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 13, 2024 10:56 ET (15:56 GMT)
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