Frustration of ‘Sequestration’ for investors
Markets slid last week as fears surrounding sequestration, Fed
policy, and disappointing economic reports finally drained investor optimism.
The S&P 500 snapped its seven-week winning streak, ending the week with a
0.28% loss; the Dow edged back into positive territory, closing up 0.13%, and
the Nasdaq trimmed 0.95%.[1]
On the sequestration front, President Obama phoned up Speaker of
the House John Boehner and Republican Senate Leader Mitch McConnell, but no
announcement was forthcoming, indicating that the two sides are still at an
impasse with just a few days remaining before the March 1 sequestration
deadline.[2]
While it’s possible that both sides may come to an agreement before mandatory
spending cuts strike, it's too early to know what the outcome will be.
Spending cuts would cause
major disruptions to government activities and stop payments to some
government-funded organizations (many of whom are in the defense sector.) While
the total economic cost of sequestration is difficult to calculate, some
analysts estimate that sequestration would contribute to the loss of 700,000
jobs (including drawdowns in the armed forces,) and shave 0.6% off of GDP this
year.[3] While these losses may not be catastrophic in terms of the
overall economy, slower growth, increased unemployment, and reduced consumer
confidence certainly won't help the economic recovery.
Investors also reacted
negatively to last week’s Federal Open Market Committee (FOMC) January meeting
minutes, which indicated that Fed stakeholders are concerned about the
potential costs and risks of future assets, meaning that the Fed may be cutting
short its quantitative easing initiative. Hopefully, we’ll find out more when
Ben Bernanke speaks before the Senate Banking Committee on Tuesday and the
House Financial Services Committee on Wednesday.[4] Applications for jobless
claims increased for the first time in three weeks, returning to pre-holiday
season levels and showing little improvement.[5] While employment appears to
be stable, some analysts have expressed concern that the pace of hiring is not
picking up.
Bottom line: Equity markets may
continue to respond nervously to the upcoming sequestration deadline, though a
deal could lead to a market rally. As lawmakers tackle the country’s spending issues and the Fed clarifies future
actions, we won't be surprised by continued volatility. In the meantime, we’ll keep you updated with news on sequestration
talks and related issues. Should you have questions about how these matters
affect your long-term financial plans, please feel free to reach out to us. We
hope you have a great week!
ECONOMIC CALENDAR:
Monday: Dallas Fed Mfg. Survey
Tuesday: S&P
Case-Shiller HPI, New Home Sales, Consumer Confidence, Ben Bernanke Speaks:
10:00am
Wednesday: Durable
Goods Orders, Ben Bernanke Speaks: 10:00 AM ET, Pending Home Sales Index, EIA
Petroleum Status Report
Thursday: GDP,
Jobless Claims, Chicago PMI
Friday: Motor
Vehicle Sales, Personal Income and Outlays, PMI Manufacturing Index, Consumer
Sentiment, ISM Mfg. Index, Construction Spending
HEADLINES:
Moody’s downgrades British debt.
Credit rating agency Moody’s Investor Service downgraded Britain’s government
bond rating from AAA to AA1, citing the country’s growing debts and “subdued”
growth prospects. Though Britain is in the midst of cost-cutting austerity
measures, analysts are still concerned about poor economic growth.[6]
Investors fear Italian election result. Italians went to the polls over the weekend to elect the next
national government. The most recent poll numbers (releasing polls during the
election is illegal in Italy) indicate that none of the front-runners has
enough of a majority to win a strong mandate. This could cause political
infighting during a tenuous period in Italy’s economic recovery.[7]
Wal-Mart’s feeble fourth-quarter results point to cash-strapped
customers. Wal-Mart’s earnings report for the last three
months of 2012 show that same-store sales grew an anemic 1%; deeper analysis of
the results shows that its (primarily low-income) customers are living
paycheck-to-paycheck and lack the confidence to spend money.[8]
Homebuilding drops, but future growth looks safe. Housing starts, a measure of new construction of houses, dropped
8.5% in January, pulled down by the volatile multi-unit category. The drop
followed a significant December increase and was largely confined to the
Northeast, indicating that winter weather may have contributed to the drop.
However, permits for future construction jumped during the same period, showing
that the housing recovery continues.[9]
QUOTE OF THE WEEK:
“When the choice is to be right or to
be kind, always make the choice that brings peace”
― Wayne W. Dyer
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[3]
http://www.ibtimes.com/cost-sequestration-700000-jobs-may-be-lost-across-board-budget-cuts-through-2014-gdp-growth-may-slow
[5]
http://www.bloomberg.com/news/2013-02-21/jobless-claims-in-u-s-increase-for-first-time-in-three-weeks.html
[8] http://finance.yahoo.com/blogs/breakout/wal-mart-atrocious-quarter-reveals-faltering-economic-recovery-152012101.html
