‘FEAR TRADE’ LOSES ITS GRIP
Unlikeliness of gun control under Trump drags stocks, demand, Joe Chidley finds
One of the perverse realities of mass shootings in America is that there are not just losers, to coin one of President Donald Trump’s favourite words — those who are killed, their families, friends and communities — but also winners. One of them, historically, has been the National Rifle Association, which typically sees a surge in membership and donations following mass shootings. And among the others have been gun companies, in the sense that their stock prices have tended to rise in the wake of highly publicized and tragic shootings.
The market dynamics behind the boost gun company stocks get after mass shootings have been as clear as they are depressing. Amid calls from victims, gun control advocates and some politicians for restrictions on firearms ownership, investors anticipate that gun buyers will scramble to purchase weapons. Stock prices go up.
You would expect that pattern to be repeated in the wake of the shooting two weeks ago at Stoneman Douglas High School in Parkland, Fla., where a gunman killed 17 people with an AR-15 semi-automatic rifle. Like others before it, that crime has stirred mass outpourings of grief and anger, and calls for meaningful gun control legislation from activists and victims. Corporate America has also responded, with many companies vowing to end discounts it used to offer to NRA members. Dick’s Sporting Goods, one of America’s biggest sports retailers, on Wednesday announced that it would no longer sell semi-automatic rifles in its Field & Stream outlets, and Dick’s stock rose marginally following the news.
There even seems to be hope for movement on the political front. Trump — who calls NRA leaders by their first names and has repeatedly vowed to protect the Second Amendment from those who would weaken it — has said that something must be done: He’s talking up wider background checks, age limits on gun purchases and a ban on so-called bump stocks of the sort the shooter in the Las Vegas massacre last October used to mow down hundreds of concertgoers.
Given the seemingly pro-guncontrol atmosphere, the “fear trade” in gun company stocks should be kicking into high gear. But it isn’t. In fact, since Feb. 14, shares in gun manufacturer American Outdoor Brands Corp. have declined by more than 15 per cent; another, Sturm Ruger has seen its share price drop by more than 13 per cent.
Compare that to the surge Ruger stock saw following the December 2012 killing of 20 schoolchildren and six adults at an elementary school in Newtown, Conn., when shares rose by more than 25 per cent in two months. Or contrast it with the killing of 49 people by Omar Mateen at Pulse nightclub in Orlando, Fla., on a Sunday in June 2016, after which RGR rose the following Monday by as much as 10 per cent.
Clearly, something is really different this time, and it says a lot about the state of the U.S. gun industry and the political dynamics of the firearms market. But it might not, after all, give much hope for rational gun legislation in the United States.
One big factor is that gun companies were already having a pretty bad time of it, thanks in a roundabout way to Trump and his election victory in November 2016. Prior to that, as polls showed Hillary Clinton had a lock on the presidency, gun inventories had been running high, in part in anticipation of the fear trade following a Democratic victory. No doubt, the gun industry was as surprised as anyone else that Trump actually won, and in some ways it’s been paying the price ever since. Manufacturers have been offering deep discounts and promotions to sell off inventory, sacrificing margins. Sturm Ruger, among others, has cut back on staff and production; Remington, a leading gunmaker since the early 1800s, filed for bankruptcy protection earlier this month.
Demand has also been declining. There are no firm numbers for sales, but the FBI’s monthly data on NICS background checks serve as a reasonable proxy. As a recent research note on American Outdoor by Wedbush Securities noted, NICS checks in the most recent November to January period were down 11 per cent year-over-year, and in January alone were down eight per cent.
In what really should be a must-read for anyone interested in the economics of gun control, the Wedbush analysts note that “news-driven sales bumps” for firearms really haven’t materialized under Trump. Their explanation is compelling: “While 2017 unfortunately saw more shootings take place … the unlikeliness of gun control under a Republican controlled government meant that the resulting surge buying we have seen in the past was largely non-existent.”
Or as American Outdoor CEO James Debney noted on a conference call in December, about a month after a gunman killed 26 people at a church in Sutherland Springs, Texas: “There is no fearbased buying right now.”
It’s too early to tell whether it will return after Parkland, but judging from the stock prices of gun manufacturers, you have to doubt whether anyone really expects change. The Wedman research note foresees little chance of radical new controls on the federal level; it sees a greater likelihood for state and local action.
As for Trump, yes, he is calling for some common-sense reform, but he’s also calling for arming “talented” teachers (“talented” in the Steven Seagal way) and turning schools into “hard targets” — fringe-y ideas that will no doubt scupper any hope for a bipartisan federal solution.
In the end, for those advocating change from America on guns, the fact that investors aren’t profiting from senseless violence might give some solace this time around. But it probably shouldn’t give them much hope.
Financial Post