With these two seemingly divergent pieces of news coming in such close proximity, you must wonder what happens now. Are stocks poised to run even further, or will the sequestration cuts put an end to the market’s exuberance? And how could these two events happen at the same time?
As to the timing, the ability of traders and investors to overlook Friday’s deadline owes partly to the fact that the cuts do not all take immediate effect; Congress still has a little time to work it out. King points out that it may take a few years to see that the realized growth rates fall absurdly below the projected ones. Additionally, early indications suggest that despite the missed deadline, the U.S. will not receive a credit downgrade, but rather will stay on the negative-outlook list.
At the extreme, some commentators suggest that the cuts will actually be good for the economy, as they will force reduced government spending. Returning to the CBO, this year’s $85 billion in cuts equates to a reduction of only $44 billion in real spending. The remainder is a reduction in spending authority; basically, Congress’ credit card now has a lower limit. When these reduced figures are used, things look a little less bleak.
The sequester will not immediately stop the Dow, primarily because it’s not the force the market is focused on as a catalyst. The more time that passes, however, the more impact those cuts begin to have, and the more likely it is that the market will react. The Fed cannot prop up stocks forever. Running to the sidelines as others pour into equities in hopes of not being left behind may be premature, but caution is warranted. When the so-called “dumb” money is joining the party late, it is often a sign the music is about to stop.
The article Will Sequestration Stop the Dow? originally appeared on Fool.com.
Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool recommends 3M, Apple, Johnson & Johnson, and Walt Disney (NYSE:DIS). The Motley Fool owns shares of Apple, Johnson & Johnson, and Walt Disney.
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