Guns and Ammo

Ever since Obama has been re-elected demand for guns and ammunition has skyrocketed. Consumer fears that Obama will introduce more anti-gun legislation has caused people to start hoarding ammunition and guns. The article points out that when Obama was elected the first time demand for ammunition increased so much that manufacturers could not keep up with demand. This drove ammunition prices up. The same thing has happened again. Ammunition is scarce and gun manufacturer's increases in stock price have been in the double digits. Since November 6 Smith and Wesson's stock price has risen by over 16%. Ruger's has risen by an astonishing 32%!! The market seems to be overreacting to this trend and I expect stock prices to settle in the future.


Michael said...

I completely agree with Zach's assessment that the stocks of gun and ammunition manufacturers are "overbought". It is unnecessary fear that usually leads to this type of irrational exuberance. All an investor has to do is look back on what happened the last time Obama was elected to see how these stocks became overbought and subsequently sold off. For example, the last time Obama was elected, Smith & Wesson Holding Corporation's share price went from $1.67 to $7.27 within a six month period. This is a gain of 335%. Once the hype faded however, the stock price retraced most of these gains. In late 2011, Smith & Wesson was trading at roughly $2.60 a share. Due to these facts, I believe investors should be extremely cautious if they are considering an investment in these types of companies. Aren't we taught to buy low and sell high? So lets not get caught up doing just the opposite.

Dr. Tufte said...

Zach: 100/100
Michael: 50/50

I understand half of this, and I don't understand the other half.

The economic response of ammunition demand seems emotional but not irrational: it's elastic with respect to the election result.

But the financial response of stock prices strikes me as very unusual. Stock prices are supposed to efficiently incorporate available information, and should largely reflect surprises. Obama's election in 2008 surprised no one. Obama's re-election in 2012 surprised no one who was looking at what the median voter was saying in polls, or what the betting markets were predicting. So why did stock prices change? I suggest this is a topic that's actually going to get some play in the top finance journals over the next few years.

Owen said...

Even though Obama was favored to win both elections, there was still hope on Wall Street that McCain and Romney would win. Especially if you look at what happened Election Day of this year, prices went up in hope that Romney would win the election. No one knew for a fact that Obama was going to win; leading in the polls does not mean election victory. If I would have known for a fact Obama was going to win the election I could have made a pretty penny on the market that day. But I still hoped and believed the American people would do what is best for the economy. The market is still run by people who hope for the best or assume the worst. If the market was completely automated these sorts of situations wouldn't happen, but with it being run by humans with emotions these sorts of things happen.

Alexa said...

I agree that some people will overreact to President Obama achieving office for a second term. I believe that the stock prices of these companies will change as they experience change in demand for their products. I am sure that the manufactures of firearms and ammunition are enjoying stronger demand for their products right now.
It is a concern to me when police departments experience a shortage of ammunition. I understand that the military uses the same caliber as many police officers. Higher demand can mean longer lead-times in production for new orders. I am sure they have a larger supply of ammunition now.

Dave Tufte said...

Owen: 50/50.
Alexa: 47/50 (spelling).

Oh, I think you're right Owen. I'm just surprised at the scale of price changes ... not that they happened.

Alexa: my point is not that demand changed, but that expected changes in demand shouldn't do much to stock prices. Unexpected changes in demand should change stock prices much more.

Aiden said...

There is a lot of very compelling arguments on this subject. My opinion is that the election was not even close to as clear cut as the 2008 election. Depending on the day and poll, you had a different leading campaign. The markets were operating under a very certain possibility that the Romney/Ryan campaign had as much a shot at the White House as the incumbent and that was the explanation for the "overreaction" in the markets immediately following the election. At one point, just a month before the election, the Obama campaign was taking on water faster than they could bucket it out. My point being, no matter who won that election, the market was going to react significantly in one direction or the other starting on the 7th of November.
In regards to ammunition and gun manufacturers, I am sure that they are operating on plans to see their share prices, product demand, and product supply move in the same manner that it did in 2008. We, as consumers, always overreact. I would be very surprised if the administration tried to do much with the gun rights of citizens. The subject is so volatile that even though he is in his final term it could destroy the parties hopes of a 2016 candidate if they were affiliated with some sort of major gun control change.

Dave Tufte said...

Aiden: 47/50 for a possession error.

We're getting way off topic here ... but I think the markets where investors have real money on the line are more unbiased than residents of Utah this time around. No offense, but we weren't exactly exposed to much pro-Obama news here.

Anyway, from the start everyone knew that Obama had a few more states in his corner to start out with, that there were 11 states in play, and Romney had to win 8 of them to win the whole thing. And, even Republicans are admitting that conservative-leaning media outlets were doing more cheerleading about those 8 states than realistic reporting. Through all of the bluster of October, most outlets never got Romney winning more than 5 of those, and in the end he won just three.

So, my bottom line is that I think financial markets understood this. Which in turn makes any price bump in gun stocks that much more surprising.