Why Markets Have Weathered the Sequester

Posted on March 4th, 2013

Screening through the blogosphere this morning, I was directed to this WSJ article from one of our favorite source, The Big Picture.

Number of the Week: Government Payrolls Shrinking Even Before the Sequester
 As the article points out, government spending for non-entitlement programs has been on the decline for some time now.

“Federal spending is still rising. But that is mostly because of the rising cost of entitlement benefits, primarily Social Security and Medicare, as well as interest on the national debt. Spending on most everything else, from defense to scientific research, is falling as a share of economic output—and in many cases falling outright. Inflation-adjusted federal spending, as measured by the Commerce Department in its GDP accounting, has fallen in seven of the past eight quarters.”
 
This excerpt and chart paints the picture that as far as business are concerned, Federal spending to businesses has been pulling back for some time now.  Add to that the media hype around the fiscal cliff, and businesses have been prepared for some time now.
 
So with the exception of some industries like defense and private practice doctors, publicly traded firms of the stock market are probably going to be able to weather the initial impact. This is why the market hasn’t really balked at the failure of Congress to renegotiate the sequester ahead of March 1.
 
What the market IS going to watch with some interest is how these cuts will impact GDP in Q3 and Q4 of 2013, and VERY closely how they show themselves in Q1 and Q2 of 2014. By that time their impact should be digested or at least the magnitude understood AND the next year’s additional cuts will begin to surface. So all in all, you can expect that the markets are going to make their decision one way or another come the end of this year how to treat the sequester. Just another item to put on the back burner of the government “yet to come” impact on your portfolio value.


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