When asked by a passerby what the stock market was going to do next, Morgan responded simply: "It will fluctuate." 

 --Attributed to J.P. Morgan

I thought it might be a good moment to return to a perennial topic of the performance of the stock of Government contractors. I last covered this topic on June 22, 2022. See https://www.awrcounsel.com/blog/2022/6/22/dont-quit-your-day-job-to-trade-government-contracts-stocks-and-dont-expect-government-bailouts-of-any-but-essential-industrial-base-contractors?rq=FEDX%20. My proxy for the performance of government contractors is the Emiles Trust Federal Contractor  (Symbol “FEDX”), an exchange traded fund (“ETF”) for which I purchased one share back on December 29, 2020. That single stock share has fluctuated, as is always the case, and today, after about 21 months, is down 6.07% before the opening bell. The S&P 500 index, in contrast, is ever so slightly up in the same period of time. The FEDX ETF has been range bound for most of this period, down between 5% to 7% the three times I have blogged about it, mostly steady as it goes but slightly negative.

So, what is the meaning of this? It means that the returns of government contractors have trailed the market in the recent past and are slightly negative overall. It also means that the real return with annual inflation now running in excess of 8% are more sharply negative. The impact of the pandemic, the war in Ukraine, and the resultant wild federal spending apparently has not really trickled down to the wider government contracting community. So much for war profiteering. As a defensive group of investments, one would have thought the government contract world would have done better than average, not worse, in that period of time.

Who is to blame? I would blame the inflation bogey man. We have written on this subject before too, most recently last week. See https://www.awrcounsel.com/blog/2022/9/28/inflation-relief-for-government-contractors-were-here-to-help-chapter-two. It simply hard to produce a satisfactory return on your investment doing fixed priced government contract work in an inflationary era.  When I look back at my earlier blog, I think it stands the test of time. Here is the major point I made:

The biggest part of the FEDX ETF is defense contractors. And, if defense contractors can’t goose their stock prices during a European land war of uncertain duration, when will the good times roll? I guess the lesson is that inflation hobbles and eventually destroys everything in its path, even large defense contractors.  Meanwhile, the answer to persistent high inflation is high interest rates and recession, a different evil for the business community.

Accordingly, the takeaway is that if you are a fixed-priced government contractor, locked into the second year of a five year contract, good luck with that, especially if you only escalated your bid price by 2% annually each option year. You are now riding the inflation tiger, and you may yet be eaten alive.

https://www.awrcounsel.com/blog/2022/6/22/dont-quit-your-day-job-to-trade-government-contracts-stocks-and-dont-expect-government-bailouts-of-any-but-essential-industrial-base-contractors?rq=FEDX%20.