Although not a widely accepted indicator, we like to look at the number of NICS firearm background checks as a barometer for fear and geopolitical volatility for the United States. In uncertain times (like the beginning of government-imposed COVID lockdowns), background checks tend to spike. Inversely, when times are good, background checks tend to decline. An additional causal factor of background check spikes is the outlook on gun policy. When the public feels as if gun policies are going to become stricter, Americans tend to rush to purchase firearms, which is evidenced by the record y/y increase after President Obama was reelected. Recently, several mass shootings have brought gun control regulations back into the news cycle, so one would expect to see background checks tick higher. Granted, much of this rhetoric really picked up towards the end of the month, so any effects will likely be seen in June (or later) numbers. Nonetheless, background checks declined for the second consecutive month after briefly spiking earlier this year. In May, checks declined by 27.4% y/y to just 2.3 million.
On a YTD basis, background checks have fallen by 30.7%, the largest first five-month decline since at least 2000.
Although the decline is certainly significant, monthly background checks are still comfortably above their longer-term trend line. To summarize, although checks are down significantly y/y, the long-term uptrend that was in place prior to the COVID surge is still largely intact.
Although we like to think that the market is forward-looking, the price action of gun manufacturer Sturm Ruger (RGR) tends to be highly correlated with the number of background checks over the prior twelve months. Since the start of 2000, RGR’s end-of-month close and the trailing twelve-month background check figure has held a correlation coefficient of 0.90, a near-perfect positive relationship. Therefore, a reversal in the downside momentum of background checks as Americans step up purchases in advance of perceived or actual new regulations in gun ownership would leave room for upside in RGR.
Looking at the last twelve-month price charts of two firearm manufacturers, a relatively similar pattern emerges. RGR and Smith and Wesson (SWBI) are both in sustained downtrends. However, both have seen consolidation as of late, and SWBI is even testing its trendline. The decline has been warranted due to the significant decrease in background checks (and in turn firearm purchases), but a reversal higher in checks would likely provide a tailwind for both companies. Click here to become a Bespoke premium member today!
