Although 2008 was the worst year that the stock market has experienced since the 1930s, aerospace and defense companies continued to outperform the broader markets, with the benchmark SPADE Defense Index (ticker: DXS) outperforming the S&P500 for the ninth consecutive year.

An 8.21 percent surge in December saw the sector, which trailed the market most of the year, end on a positive note. Although the index finished 2008 down 38.03 percent, the worst it has recorded since launching in 1997, December’s gain enabled the Index to finish ahead of the S&P500 by 46 basis points and overcome a year that saw the Index trade downward due to pressure from the market, a strike at Boeing which impacted a number of firms, and the uncertainty associated with a presidential election.

Three-, five-, and ten-year performance is significantly ahead of the broader markets, producing gains of [9.66 percent], 14.60 percent, and 86.69 percent, respectively. The Powershares Aerospace & Defense ETF (NYSE: PPA), which seeks to replicate the performance of the SPADE Defense Index. According to Scott Sacknoff, President of SPADE Indexes, “Investors should not forget that companies involved with defense, homeland security, aerospace, and government space activities generate nearly 5 percent of U.S. GDP. With the government as a primary customer, they are less likely to be directly affected long-term by economic factors associated with the banking crisis, recession, and inflation. Additionally, the sector remains a major source of manufacturing jobs in the United States and should benefit from the 2009 infrastructure initiatives. Healthy balance sheets and a number of trends suggesting growth can continue.

Notably:

• The mission to protect and defend the U.S. and its citizens remains a critical goal of government
• Support for defense and security initiatives inside the Obama administration is strong
• A tremendous need to recapitalize equipment used in Iraq and modernize defense equipment and systems exists
• Continued expansion in related business lines such as cybersecurity and the delivery of commercial aircraft

Mr. Sacknoff concluded stating that, “While the sector may move in sympathy with the overall market at times, the underlying factors driving the defense industry remain quite different. As investors return their focus to fundamentals, defense companies should benefit.”