Fiscal Cliff, Part 2: Here We Go!

After breaking a seven-week winning streak last week, stocks are off to a positive start on Monday, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow (DJINDICES: ^DJI  ) up 0.63% and 0.55%, respectively, as of 10:05 a.m. EST.

The macro view: T minus 4 to the sequester
Maybe the macro picture isn't the only thing that counts after all: Moody's knocked the U.K.'s credit rating down from its "AAA" perch on Friday, but U.K. stocks are brushing it off as if nothing happened, and the
FTSE 100 (FTSEINDICES: ^FTSE  ) index has gained a solid 1.3%. In truth, the consensus appears to be that this downgrade was long overdue -- after all, it's hard to justify rating the U.K.'s credit more highly than that of the U.S.

And speaking of the U.S. government's finances, the so-called "sequester" is scheduled to begin on Friday, barring any last-minute intervention by Congress. This involves across-the-board spending cuts in order to achieve $85 billion in savings this year. The sequester was originally conceived during the 2011 debt ceiling showdown -- it was then thought to be so drastic that it would force the two parties to find a compromise. On that basis, it would appear that it wasn't drastic enough, as no compromise is in sight.

What is the impact of the sequester on growth? Roughly half a percentage point in 2013, if we are to believe the forecasts from a range of government and private sources. That's not insignificant, considering that the latest forecast from the National Assocation of Business Economists is calling for just 2% growth this year. Furthermore, the half a percentage point covers only the effect of the sequester; it does not include the expiration of the payroll tax holiday, which took effect on Jan. 1, for example. One-third of NABE panelists estimate the total impact of the budgetary tussles at between one-half a percentage point and a full percentage point.

Note that the U.S. unemployment report for February will not be released this coming Friday -- even though it's the first Friday of the month -- but on the following Friday instead (March 8). With the sequester on the agenda, we should have all the macro-driven volatility we need for the week, anyway.

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  • Report this Comment On February 25, 2013, at 10:39 AM, jonpete69 wrote:

    Let's put this in human terms. Assume a family with an income of $25,000 and expenses of $35,000. The husband complains about draconian cuts when his wife insists that he give up his morning Starbucks for a $3 or $4/day savings.

  • Report this Comment On February 25, 2013, at 4:44 PM, TMFAleph1 wrote:

    Thanks for your comment, jonpete69, but I'm not sure that's an adequate comparison.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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