The markets have done mostly what they did with the fiscal cliff: wonder, shrug, announce a plague on both houses and kept moving. Here's the run down on three things that came at us:
-Christian W. Thwaites, president & CEO, Sentinel
There was plenty of news to threaten the recent market rallies but, as of writing, we’re within a whisper of all time highs in US stocks and managing to have a very orderly consolidation in bonds. This is surprising because the political process has once again taken careful aim and shot itself in the foot. The sequester has become the dumb answer to difficult questions and will initiate, mostly indiscriminate, across-the-board cuts. The markets have done mostly what they did with the fiscal cliff: wonder, shrug, announce a plague on both houses and kept moving. Here's the run down on three things that came at us:
The headline total is about $110bn over two years and comes from the Budget Control Act of 2011. It is a straight cut to budget expenditures and meant to be equally painful to all discretionary spending...so it does not touch Medicaid or Social Security. It was effective January 1st 2013 but postponed until March 1st. Some $88bn of the cuts fall in 2013, the rest next year. About half is defense spending but excludes uniformed military personnel. Depending on timing, it’s a hit to GDP of about 0.5% this year and 0.1% next year.
There are two effects of the sequestration. One, that if there's no middle ground on a relatively small issue, then what are the hopes of something bigger like the budget, continuing resolution and debt ceiling? Two, that GDP can ill afford more contraction in fiscal policy. In the latest GDP revisions for Q4 2012, we went from -0.1% to 0.1% or, put another way, we increased the economy by an annual rate of $4bn. Government expenditures contributed -1.38% to growth. Here's the year over year growth in government expenditures.