Sequestration and the Aftermath

The sequestration deadline has come and gone with most people probably thinking to themselves “now that wasn’t so bad.”  To take a phrase from PIMCO’s Mohamed El-Erian and use it in a different context, it feels as though we’re finally getting used to Washington’s “New Normal.”  We saw it with the Fiscal Cliff and we’ve once again seen it with the sequestration, when it comes to dealing with major issues our elected officials demonstrate little sense of urgency and any ability to compromise in order to find a resolution. Everyone in Washington is to blame here which is reflected in Congress’s current overall approval rating of around 15%, but I digress. Let’s focus on how sequestration will affect the US economy and the markets going forward.

Now with sequestration in place, we’re looking at an approximately $85 billion reduction in federal government spending for 2013.  While it’s evident that Washington has to find a way to slow down their spending, an $85 billion cut without any rhyme or reason is probably not the best way to move a slow growing economy forward.  Fortunately the cuts only make up approximately 1 percent of our country’s overall GDP and the Congressional Budget Office estimates that the cuts will reduce GDP by approximately 0.6% for the year.  It’s unfortunate that some jobs may be lost in this latest round of spending cuts, but we aren’t taking the doomsday approach some media outlets and politicians have been promoting recently. It would have been much more reasonable for Washington to come to a grand bargain to deal with our major issues (entitlement spending, tax loopholes), but for any resolution to come in those areas we’ll have to wait for their next artificial deadline to be put into place.  As we have been saying recently, our economy will still grow this year even with the cuts and we will be looking at energy, manufacturing and housing to lead the way.

Much as it was with the fiscal cliff negotiations, it would have been a mistake to sit on the sidelines as you waited for the sequester talks to settle.  As we’ve seen in the days leading up to the deadline, and now the day after the deadline, most of the uncertainty has been built into stock prices and investors have come to expect this from Washington.  US corporations are still operating very efficiently and their balance sheets have never been better with cash at its highest level in years. Even though there is fear of a slowdown in the US economy because of sequestration, it’s important to remember we now live in a global economy with large cap US companies generating over 30 percent of their revenue from foreign sales. The valuation of the US market is still very reasonable and as always, we continue to stress that a diversified portfolio is paramount given the current political and economic environment. We continue to find value in markets around the world equity markets and know that it is important to have exposure to these economies to help facilitate growth in a portfolio.  As we advised regarding the fiscal cliff, it’s always better to have your portfolio positioned for the day after these deadlines and invested for the long-term.