Key Points

  • In recent months, two investment themes have been rewarding investors with outperformance: companies in the defense sector and those participating in share buybacks.

  • If geopolitical tensions ease, the outperformance by defense stocks may not be sustained. If they flare up, this investment theme may see volatility given a history of inconsistent performance.

  • The trend of rising outperformance by the shares of companies announcing buybacks has been remarkably stable in both the U.S. and European markets. History shows this theme could be sustained for years.

In recent months, two investment ideas have been rewarding investors with outperformance: companies in the defense sector, and those participating in share buybacks. Let’s take a close look at what may be driving both of these market themes and whether the outperformance is likely to continue.

Defense

This year has seen frequent overall market trend reversals, yet defense stocks have consistently posted larger gains relative to the rest of the market, year to date, as you can see in the chart below.

Defense has been a good offense for investors

Source: Charles Schwab, Bloomberg data as of 4/23/2021. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

Defense spending has not been favored in 2021 government budgets, but rising geopolitical tensions often inspire gains in this area of the market, so it’s worth taking a look at what might be causing the outperformance in recent months.

  • Increasingly heated rhetoric and threats between nations, such as China-Taiwan, U.S.-Russia, Israel-Iran, may involve U.S. or its allies.
  • Adversaries often use national elections and changes in administration to challenge and test foreign and domestic policy positions. The U.S. Biden administration hits the first 100 days in office milestone this week.
  • Securing economic resources (COVID-19 vaccines, semiconductors, energy commodities) heightens the risk for armed conflict between nations.