Is Wall Street Abandoning Gun Manufacturers?

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There have been clear signs this week that after the tragedy in Newtown, Conn., the balance of power in the debate over gun control is shifting. Pro-gun Democrats with stellar ratings from the NRA like West Virginia Senator Joe Manchin and Viriginia Senator Mark Warner came out in favor of increasing federal restrictions on gun ownership, while Republicans like Iowa Senator Charles Grassley and ten-term Republican Representative Jack Kingston of Georgia both agreed that Congress should at least consider tightening gun control as part of a broader effort to curb gun violence, according to the Associated Press.

Of course there’s a big difference between politicians talking about reform and actually passing potent legislation. After all, we’ve witnessed a number of these shootings over the years, and few if any have lead to a statutory response that had an appreciable effect on gun violence. But if you pay attention to Wall Street, there’s reason to believe that this time may be different.

(MORE: Three Approaches to Curbing Gun Violence — Using Economics)

The stocks of two of the largest publicly-owned gun manufacturers — Smith and Wesson Holding Company and Sturm Ruger and Co. — have both seen their stock prices tumble since Friday’s shooting, even though is reporting anecdotally that gun sales have gone through the roof in the wake of the shootings. This is in stark contrast to the days following the Aurora, Colo., and Oak Creek, Wis., shootings, when share prices in gun companies declined only slightly or actually increased, according to a report in The Wall Street Journal

In addition, following an announcement from the California State Teachers’ Retirement System (CalSTRS) that it would review it’s $751.4 million investment in private equity firm Cerberus — which owns Freedom Group, the manufacturer of the Bushmaster rifle allegedly used in Friday’s shooting — Cerberus announced yesterday morning that it would immediately explore options to sell the gunmaker.

(Meanwhile, Dick’s Sporting Goods has suspended the sale of some of its hunting rifles, according to a statement on it’s website: “Out of respect for the victims and their families, during this time of national mourning we have removed all guns from sale and from display in our store nearest to Newtown and suspended the sale of modern sporting rifles in all of our stores chainwide.”)

Which is to say, it looks like the smart money on Wall Street is betting on increased gun regulation. After all, a company like Freedom Group would stand to lose a lot from the reintroduction of a so-called assault weapons ban, which would likely prohibit the sale or manufacture of more than a dozen different gun models. And while it’s not clear that increased regulation would do a lot to restrict access to guns, it would almost certainly hamper the growth prospects of gun manufacturers.

(MORE: America’s Gun Economy, By the Numbers)

But in the end, gun control is a political — not a business — matter, which Cerberus is keen to point out in it’s statement:

“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level . . .  As a Firm, we are investors, not statesmen or policy makers.  Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals.  It is not our role to take positions, or attempt to shape or influence the gun control policy debate.”

Daniel Gross takes aim at this stance in a recent column, arguing that Cerberus’ well-connected leadership (including former Vice President Dan Quayle and former Treasury Secretary John Snow) doesn’t always shy away from political debates:

“Cerberus executives, including its founder, Stephen Feinberg, have given heavily to political campaigns (virtually all of it to Republicans). For people who chose to operate in regulated industries, who choose to invest in government contractors, and who participate in the political process at a high level to suddenly plead a lack of interest and competency in such areas now that there’s a national debate on gun control is highly convenient.”

Business leaders tend to engage in politics only when such engagement can help their bottom line — and they generally avoid getting involved when it can’t. This is to be expected. It’s exceedingly rare to see social change instigated by business, and the gun control debate will probably be no different.

But while Wall Street isn’t often a crusader for public safety, its behavior can be a good predictor of the future. And Wall Street’s magic eight ball seems to be saying that “all signs point to gun control.”

(MOREWhen Massacres Force Change: Lessons from the UK and Australia)