I just wanted to post a short note as many clients and investors in general are questioning what happens to the market if the sequestration takes place. My short answer is…not much.
First, $85 billion in cuts, as I understand it, is for the year. We spend about $1,500 billion a year. That is 5.6% cut in what we have been spending. In 2013 the government is projected to take in the most money ever in terms of revenue. We are spending nearly a $1,000 billion more now than we did in 2007 – prior to the financial crisis. And the “cuts” aren’t so much cuts, as they are reductions in increased spending.
Right now politicians are playing politics by fear mongering the affects of across the board cuts. This is typical negotiating. The reality, that absolutely everyone knows, is that there is $85 billion of wasted spending in government. We just need someone to show some leadership, and whack off the waste instead of “throwing poor kids out into the street”. While both parties can share the blame, it is appalling that President Obama is saying that he cannot move an aircraft carrier to the Middle East because we don’t have the money with the pending mandatory cuts.
Based on today’s solid stock market action, Wall Street is calling Washington’s bluff. The economy is showing solid, if tepid, positive signs. No one wants to be responsible for sidetracking what appears to be a real economic recovery. If “real” programs are cut – shame on Washington. There is no need. And I think that in a worst case scenario, that is what will come out and it will be an embarrassment to all.
The real question to ask is, “Which way does the market go from here?” I have spent the morning, really the last couple of weeks, looking for an answer. While the crystal ball is a little hazy, the fact is the market is neither expensive nor cheap at this point. I’ll be digging into this statement with more detail in my next post. For now we are in a “show me” market. I’m not about to guess at the market’s short term direction. I’ll just sit back and let it show me which way it wants to go… and have an investment plan for whichever way that plays out to be.