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.
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The gradual rolling out of cuts may well be a boon to the market, mitigating the blow for investors.Skip to next paragraph
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Investors are still counting on a deal.
That gradual pace of cuts also gives lawmakers more time to hammer out some sort of deal that could mitigate or even overturn the cuts – a development many in Wall Street are counting on, analysts say.
“Neither party wants the sequester cuts to take place in the current form, so I don't think you can rule out the cuts being overturned in the coming weeks or months,” says Housel of the Motley Fool.
“Investors are actually making the assumption that some other type of arrangement will be made ... some type of deal ... that softens the blow or changes the places where cuts are made,” Hogan adds.
In fact, as inflexible as the cuts appear, “policymakers have a variety of tools at their disposal that would allow them to delay or ameliorate the full impact of the budget tightening,” CBS News reports, adding that congressional Republicans are working on legislation that would give the government greater latitude in allocating cuts, potentially redirecting them toward less crucial functions within an agency.
In the grand scheme of things, the cuts are relatively small.
Deal or no deal, the cuts actually represent a relatively small percentage of federal spending. Too small, some analysts say, to do serious damage to the economy – or the stock market.
Consider this: This year’s entire slate of spending cuts – about $85 billion – are expected to shave only about half a percentage point off GDP growth.
The Federal Reserve, says Mr. Chandler of Brown Brothers Harriman, is currently buying about $85 billion worth of Treasury bonds and mortgage-backed securities every month.
“On the big scale of things, it’s not so much,” he says.
Wall Street is ignoring Washington’s drama.
Following the frenzy of the fiscal-cliff standoff late last year, Wall Street, like parents accustomed to their teen’s dramatics, is ignoring Washington’s antics.
“We're just continuing to desensitize,” Jim Paulsen, chief market strategist at Wells Capital Management, told CNBC. “How many times are you going to sell out on some kind of Armageddon story, only to watch the darn thing go to new highs?”
In other words, Housel says, Wall Street is Washington-wary.
“We've learned over the years to not pay too much attention to Washington battles,” he says.