Insights & Advice


Sequestration Takes Center Stage

Will Washington cut spending?

Here we are less than two weeks from the March 1 deadline implementing $1.2 trillion in automatic spending cuts and suddenly investors are getting concerned.  How convenient is that?

Why now? You might argue that Wall Street is so inured to these last minute fiscal cliff hangers that no one pays attention until the eleventh hour. Is it any coincidence that at the same time the averages are making a run toward their record highs?

Those who have been reading my columns are aware that the markets are overbought. I have been expecting a pause in the market’s slow grind higher. Investors may simply use this upcoming sequester deadline as an excuse to take some profits. As for me, I remain largely indifferent to whether Congress and the White House miss the deadline or not.

The agreed-upon cuts were designed to be evenly split between discretionary defense spending and discretionary domestic spending. Most of us believe that the Republicans would find cuts in things like weapons purchases, base operations, construction work etc. to be the most painful, while Democrats would feel the cuts in domestic spending the most. That’s not true.

There are just as many blue (Democratic Party-held) states impacted by defense cuts as red (Republican Party-held) states. As for government spending, red states account for the majority of social domestic spending in this country. The point is that these cuts were designed to hurt both parties and their constituencies equally.

Not all of the $1.2 trillion in cuts will happen this year. The cuts will be spread over ten years. In 2013, defense spending will be cut by $42.7 billion while domestic spending will be slashed by $28.7 billion. An additional $9.9 billion will come from Medicare cuts and $4 billion more in other mandatory cuts in both defense as well as nondefense programs. The total comes to $85.4 billion.

Although that would hurt the overall economy, ($35 billion more than the devastation generated by Super storm Sandy) by itself, it would not send the nation into recession. It could, however, slow growth by 0.05 to 1.50%, depending on who you believe.

Yet, the impact of these cuts on jobs in highly visible areas such as first responders, air traffic controllers, airport security, etc. has not been lost on the public, thanks to the president. President Obama, who wants the Sequester replaced by a package of moderate spending cuts and tax increases, has used the Sequester to his and his party’s advantage in stump speeches around the country. Evidently it’s working, since his approval rating is at his highest since 2009.

In retaliation, the Republicans are trying to pin the blame for the Sequester on the president. It appears the public disagrees. Only 31 % of Americans would blame President Obama if the spending cuts were to go into effect, while 49% would blame the congressional GOP, according to a recent poll by the Pew Research Center.

I predict that the outcome of this debate will be another loss by the GOP in Congress, either before or after March 1. The Sequester will be scaled back or canceled altogether.  You see the politician values votes far more than principles. The Sequester would damage their re-election chances. It is why I am not concerned with any minor sell-offs in the markets over the next two weeks and why you shouldn’t be either.



Posted in At the Market, The Retired Advisor