The stock market, flirting with all-time highs, seems relatively unfazed by Washington’s latest fiscal stalemate over the sequester. Financial analysts present six reasons for the new attitude.
Workers, families and businesses nationwide are bracing for interruptions in pay, benefits and revenue with the Federal sequester taking effect as of Friday. Financial players on Wall Street however may be taking a seemingly disengaged attitude toward Washington’s unwillingness to reach any budgetary accord.
“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.”
Wall Street’s unwillingness to panic could be a critical mitigating factor in how the sequester impacts the nation’s already shaky economy recovery. Typically stock market performance is regarded by economists as a leading indicator of general economic performance. Stock indices have been showing record highs and may already have factored in the risks of sequester into equity prices. Wall Street also appears to have accommodated itself to persistent political intransigence in the nation’s capital.
Christian Science Monitor correspondent Husna Haq wrote Friday, “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.
“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,” continued Haq.
“The market has in large part moved on,” according to Lazard Capital Markets’ Art Hogan. “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.”
Motley Fool analyst Morgan Housel argues the macroeconomic side saying government spending cuts are just one part of the whole 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,” Housel says.
Haq sums up Wall Street punditry’s outlook in just a few salient points: that Wall Street has been buoyed by a generally improving economy and the stock market is a reflection of the health of corporate America, which already has factored in doubts over what the Federal government might do with plenty of time now to adjust value estimates.
“We have record corporate profits and record dividends, so it’s not surprising that stocks are doing well,” Housel states. “So even though we have high unemployment and political dysfunction, corporations have never been more profitable. And over the long run, profits are what drives the market.”
And it seems investors are finally taking notice. With weak returns on bonds, investors are returning to stocks, further bolstering the market.
“Bonds and cash have really run their course,” Housel says. “Investors are realizing that if they want to earn a return on their money, they need to come out of their bunkers and participate in the stock market.”
Financial and general news media also have been noting that the anticipated impacts of an ongoing sequester – if not resolved – will be gradual and actually amount to just a small fraction of the total public sector. Investors also are still counting on a deal according to Haq’s evaluation of analyst opinions.
“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.
All in all, Wall Street at this time regards Washington headliners as insignificant in relation to other factors driving market fundamentals.