Wall Street shrugs off 'sequester': Why is it ignoring Washington this time?
The stock market, flirting with all-time highs, seems relatively unfazed by Washington's latest fiscal stalemate over the sequester. Here are six reasons for the new attitude.
Sweeping government spending cuts are set to go into effect by the end of Friday, a move some in the government have called calamitous – and yet financial markets appear to be unfazed by the “sequester.”Skip to next paragraph
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The across-the-board cuts have inspired doom-and-gloom scenarios, with government officials warning it would result in airport delays, furloughs in the Pentagon, reduced border security, lost access to Head Start for almost 5,000 low-income children – and potentially more forest fires and chicken shortages.
Previous fiscal showdowns in Washington – like the "fiscal cliff" standoff late last year – left investors jittery and the stock market wobbling. This time, analysts say, the market is ignoring Washington’s antics.
“The market has completely shrugged it off,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “People have barely batted an eyelash.”
Indeed, Wall Street indexes closed higher on Friday: The Dow Jones Industrial Average rose by 0.25 percent to close at 14089.66; Nasdaq rose 0.30 percent to close at 3169.74; and the Standard & Poor’s 500 rose by 0.23 percent to close at 1518.21.
And the stock market is at a five-year high, with the three main indexes near record territory. The Dow has recovered all the losses it incurred during the financial crisis and is now near its pre-recession peak. Following the dotcom bust of 2001, the Nasdaq is trading at an all-time high. And the S&P 500 has been rising steadily since the fiscal cliff standoff, now at its highest levels since 2008.
If the spending cuts go through as planned, the market will certainly feel the blow, but for now, it’s business as usual on Wall Street.
Why is the market continuing to improve despite the prospect of weaker growth as a result of the sequester? Analysts count a number of reasons behind the relative stability of the market, from strong corporate earnings and a rebounding housing sector, to an investment community that’s had time to adjust to the impending cuts and that continues to expect some sort of deal to mitigate the sequester’s impact.
“The market has in large part moved on,” says Art Hogan, a managing partner at Lazard Capital Markets. “By that I mean, as you look at the fiscal cliff, how much angst was in the market, we’re not seeing anything that resembles that whatsoever.”
Wall Street is buoyed by an improving economy.
Broadly speaking, the economy is continuing a slow but steady recovery, and Wall Street has reacted accordingly, assuming that growth in strong sectors of the economy will largely offset the impact of spending cuts.
“We have what appears to be an improving economic picture,” Mr. Hogan says. “When you juxtapose better economic data ... against the potential impact of cuts in government spending, investors are more attuned to the stronger economy. That may well outweigh the potential impact of cuts.”
Government spending cuts, adds Morgan Housel, a macroeconomic analyst with the Motley Fool, an online financial education website, are just one part of the stock-market equation.
“The market looks at corporate America in its totality, and right now the rebound in housing and energy are likely to offset any damage from the sequester,” Mr. Housel says.
Furthermore, the economy has improved in part because the Federal Reserve has kept interest rates low to encourage growth. Low interest rates mean low yields on bonds, which in turn drive investors toward stocks, driving the market higher.
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