Euro-area inflation reached a new high and geopolitical tensions continue to climb, as the war in Ukraine entered its seventh month. Continued uncertainty may fuel a longer-term trend of rising global defense spending.
Ahead of the Labor Day weekend, stocks slid lower for the third straight week as the S&P 500® Index declined 3.2%. Fixed income didn’t yield much better news; high-yield spreads rose 41 basis points (bps) last week to 4.93%, nearing its top decline for the trailing 10-year period.1
Inflation Pressures Remain in US
US jobs data and consumer confidence both beat consensus estimates last week, increasing the potential for sustained inflationary pressures.2 And ahead of a potential COVID-19 surge this fall, the Food and Drug Administration (FDA) and Centers for Disease Control and Prevention (CDC) authorized updated boosters from both Pfizer and Moderna that target the BA-4 and BA-5 variants.3
Tensions Increase in Europe
The UK has chosen a new Prime Minister; Liz Truss takes over as Boris Johnson steps down.4 Euro-area inflation hit another all-time high of 9.1%, led by energy and food price increases.5 On Thursday, the European Central Bank raised rates by 75 bps — the largest hike since the central bank’s inception.6
The Russian state-owned energy company Gazprom stopped delivery of natural gas via the Nord Stream pipeline for scheduled maintenance. Yet shortly after the pipeline was shut down, the Kremlin warned it would not resume deliveries until the West lifted sanctions.7 EU energy ministers will meet in Brussels on Friday to discuss potential price caps as result of the energy crisis facing the continent.
Defensive Spending Set to Rise in Response to Global Tensions
Geopolitical tensions continued as the war in Ukraine enters its seventh month.8 Meanwhile, the Biden Administration is preparing to sell Taiwan $1.1 billion of missiles and surveillance radar, further straining relations in Asia.9 The war in Eastern Europe and strong rhetoric from the Asia-Pacific region have heightened discussions around national security, increasing the potential for a longer-term trend of rising global defense spending.
Global military spending is highly concentrated as more than half of expenditures come from just two countries: the United States (38%) and China (14%).10 China has consistently increased its military expenditure over the past 27 years to $293 billion11 and is likely to continue allocating more budget to defense as territory disputes drag on.
In 2021, world military spending hit an all-time high — eclipsing $2 trillion12 — and is expected to increase further as the United States is forecasted to grow its defense budget by 35% over the next decade to nearly $1 trillion by 2032.13
United States Historical and Forecasted Defense Spending
The SPDR® S&P® Aerospace & Defense ETF (XAR) may help investors capture this trend of rising defense spending. In a narrow industry dominated by several large companies, XAR’s modified equal-weight approach may help mitigate single stock risk and provide broader industry coverage relative to a market-capitalization-weighted approach.
XAR Standard Performance as of June 30, 2022
1 Bloomberg Finance, L.P., as of September 2, 2022. 2 Bloomberg Finance, L.P., as of September 1, 2022. 3 “FDA and CDC clear the way for updated COVID-19 vaccine boosters to target Omicron.” CBS News, September 1, 2022. 4 “Liz Truss installed as U.K. prime minister, replacing Boris Johnson.” The Washington Post, September 6, 2022. 5 “Euro zone inflation hits another record of 9.1% as food and energy prices soar.” CNBC, August 31, 2022. 6 Bloomberg Finance L.P., as of September 8, 2022. 7 “Russia switches off Europe’s main gas pipeline until sanctions are lifted.” Financial Times, September 5, 2022. 8 “6 key numbers that reveal the staggering impact of Russia’s war in Ukraine.” NPR, August 24, 2022. 9 “Biden Administration Preps $1.1 Billion Arms Sale to Taiwan.” Bloomberg News, August 29, 2022. 10 “Trends In World Military Expenditure, 2021.” Stockholm International Peace Research Institute, April 30, 2022. 11 “Trends In World Military Expenditure, 2021.” Stockholm International Peace Research Institute, April 30, 2022. 12 “World military expenditure passes $2 trillion for first time.” Stockholm International Peace Research Institute, April 25, 2022. 13 Congressional Budget Office, as of May 31, 2022.
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