FYI | Mar 08 2013
By Peter Switzer, Switzer Super Report
Wall Street has again finished in positive territory but will it be able to remain positive with the sequester now in place and set to reduce spending automatically? That, in turn, could take anywhere between 0.2% to 0.6% off GDP.
If nothing is done to reduce the impact of the sequester’s cuts then it will be the bigger of the two figures mentioned above. Congress could still get involved and reduce the impact of the cuts but the Yanks are now in a wait and see situation.
Before going any further, let’s understand what we’re talking about.
Sequestration means automatic, compulsory cutting to a federal budget if there is a cost overrun based on some established benchmark, such as a percentage of GDP or an actual dollar amount. The Yanks first tried this stunt in 1985 with the Balanced Budget and Emergency Deficit Control Act. The current one came from the Budget Control Act of 2011. The Yanks want to decrease the national debt by $1.2 trillion over 10 years.
Over the weekend, Congress could not come up with an alternative to the sequester and so it is operational now. Though there could be some late changes if the US politicians can come to some new agreement.
The real cost
Obama says the sequester, which will usher in $85 billion worth of spending cuts, will slow up the US economy. “These cuts are not smart, they will hurt our economy and cost us jobs,” he said. “The longer these cuts remain in place, the longer the damage.
He sees job losses of 750,000 and about 0.5% taken off economic growth.
The sequester is not over yet as in 2014 to 2021 it will force discretionary cuts in spending of $109 billion a year!
The question is will this be enough to generate the overdue bigger pullback in stocks that charts guy Lance Lai says is likely to happen?
Against this background, the next two months are actually rippers for stocks in the USA!
CNBC has pointed out that “since 1950, March and April have been positive months for the Dow, with average gains greater than a percent. April, in particular, has been the best month of the year, posting an average monthly increase of 2.7% in the last 20 years and 1.97% since 1950.”
Throw in the views of one of my favourite US analysts – Goldman Sachs’s Abby Joseph Cohen, who kept me positive in the challenging days between 2008 and 2012, when I kept recommending buying stocks , especially on the dips – and you can easily build a case for remaining positive on stocks, even in the short-term.
Fundamental support
Abby recognizes the uncertainty linked to the sequester, but also argues that the rally is supported by fundamentals.
She says fair value on the S&P 500 is 1,575, and that compares to its 1,518.2 finish on Friday [1544 last night] . She says the Fed model puts it at 1,700-1,750. "[The rally] is supported by improving fundamentals in the U.S. economy and, very importantly, valuation," she says. "[With] equities at a (price-to-earnings) ratio at 14 times earnings, they're just not expensive."
Abby also points to the cash on the sidelines, which she reckons will end up in stocks. Because of the stance of the Fed, she thinks it will be when interest rates start to rise strongly that we should get wary about the stock market.
I believe Congress could reduce the impact of the sequester cuts but even if they don’t, the Fed would just keep their easy money policy for a bit longer.
I am not ruling out Lance’s more significant pullback of say 5% but that would be a buying opportunity for a long-term player.
Even with the sequester’s full force, the experts expect the Yanks to grow at between 1.5 to 2% and that is reasonable, but those numbers could be even higher as confidence pre-sequester was on the comeback trail.
I’m putting out a sequestration on the excessive fears around the sequester!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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