Vail Daily column: Markets decline ahead of sequestration
February 25, 2013
Markets slid last week as fears surrounding sequestration, Fed policy, and disappointing economic reports finally drained investor optimism. The S&P 500 snapped its seven-week winning streak, ending the week with a 0.28 percent loss; the Dow edged back into positive territory, closing up 0.13 percent, and the Nasdaq trimmed 0.95 percent. On the sequestration front, President Obama phoned up Speaker of the House John Boehner and Republican Senate Leader Mitch McConnell, but no announcement was forthcoming, indicating that the two sides are still at an impasse with just a few days remaining before the March 1 sequestration deadline. While it’s possible that both sides may come to an agreement before mandatory spending cuts strike, it’s too early to know what the outcome will be.Spending cuts would cause major disruptions to government activities and stop payments to some government-funded organizations (many of whom are in the defense sector.) While the total economic cost of sequestration is difficult to calculate, some analysts estimate that sequestration would contribute to the loss of 700,000 jobs (including drawdowns in the armed forces,) and shave 0.6 percent off of GDP this year. While these losses may not be catastrophic in terms of the overall economy, slower growth, increased unemployment, and reduced consumer confidence certainly won’t help the economic recovery.Investors also reacted negatively to last week’s Federal Open Market Committee (FOMC) January meeting minutes, which indicated that Fed stakeholders are concerned about the potential costs and risks of future assets, meaning that the Fed may be cutting short its quantitative easing initiative. Hopefully, we’ll find out more when Ben Bernanke speaks before the Senate Banking Committee today and the House Financial Services Committee on Wednesday. Applications for jobless claims increased for the first time in three weeks, returning to pre-holiday season levels and showing little improvement. While employment appears to be stable, some analysts have expressed concern that the pace of hiring is not picking up.Bottom line: Equity markets may continue to respond nervously to the upcoming sequestration deadline, though a deal could lead to a market rally. As lawmakers tackle the country’s spending issues and the Fed clarifies future actions, we won’t be surprised by continued volatility. In the meantime, we’ll keep you updated with news on sequestration talks and related issues. Should you have questions about how these matters affect your long-term financial plans, please feel free to reach out to us. We hope you have a great week!Headlines• Moody’s downgrades British debt. Credit rating agency Moody’s Investor Service downgraded Britain’s government bond rating from AAA to AA1, citing the country’s growing debts and “subdued” growth prospects. Though Britain is in the midst of cost-cutting austerity measures, analysts are still concerned about poor economic growth. • Investors fear Italian election result. Italians went to the polls over the weekend to elect the next national government. The most recent poll numbers (releasing polls during the election is illegal in Italy) indicate that none of the front-runners has enough of a majority to win a strong mandate. This could cause political infighting during a tenuous period in Italy’s economic recovery. • Wal-Mart’s feeble fourth-quarter results point to cash-strapped customers. Wal-Mart’s earnings report for the last three months of 2012 show that same-store sales grew an anemic 1 percent; deeper analysis of the results shows that its (primarily low-income) customers are living paycheck-to-paycheck and lack the confidence to spend money. • Homebuilding drops, but future growth looks safe. Housing starts, a measure of new construction of houses, dropped 8.5 percent in January, pulled down by the volatile multi-unit category. The drop followed a significant December increase and was largely confined to the Northeast, indicating that winter weather may have contributed to the drop. However, permits for future construction jumped during the same period, showing that the housing recovery continues.Mark Ballenger is an investment and financial planning consultant offering services to individual investors and business owners. His company, Centennial Capital Partners, has a location in Avon and can be reached at 970-471-9962. This report has been created with the cooperation of Platinum Advisor Marketing Strategies LLC. Securities offered through Cambridge Investment Research, a broker-dealer, member FINRA/SIPC. Ballenger is an investment adviser representative for Cambridge Investment Research Advisors Inc., a registered investment adviser. Centennial Capital Partners and Cambridge are not affiliated.