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Sequester a stock market killer?

By Greg Guenthner ·
Monday, February 25, 2013
Posted: 10 am ET

First there was the debt ceiling. Then a "fiscal cliff" tried to ruin the party. And now, we have a sequester looming this week.

No one likes the idea of the automatic $1.2 trillion in budget cuts aimed at reducing the budget deficit that will take effect March 1 -- not even the elected officials who are in charge of coming up with a solution.

"I think the sequester was a stupid thing," New York Rep. Eliot Engel, D-N.Y., told ABC News. "I voted against it when it first time came up. Congress keeps kicking the can down the road. It's really a ridiculous thing to do."

Whether the sequester deadline passes with all of the across-the-board cuts intact or not, there is likely to be some reaction from the stock market. But it might not be what you expect.

Here's why ...

First, there's the full-court media press. Ever since the brief debt-ceiling crisis began, the media has concocted endless doomsday scenarios surrounding the federal government's budget decisions. The December fiscal cliff decision was picked up by every financial media outlet and subsequently beaten into the ground.

The markets did retreat slightly in the weeks leading up to the New Year's decision. But even when Congress announced that a virtual nondecision was made, markets shot higher. That's because the bad news was already priced into the market. Every negative scenario was known and thoroughly analyzed. Once the uncertainty of the actual deadline had passed, even a can-kicking decision was enough to lift the markets considerably higher.

Much like the fiscal cliff talks, you should not assume the new sequestration crisis will completely hold the markets hostage.

During times of uncertainty, things usually aren't as bad as they seem -- the same way the outlook is never as perfect as advertised when the economy is roaring. With investors already fearing the worst, any decision at all -- even something that might be perceived as negative -- could help ease the uncertainty and move the market higher.

The 2013 rally has already survived a fiscal cliff and higher payroll taxes. Investors have proven they're willing to climb the wall of worry (for now) in the face of some bleak data. The Chicago Tribune has compiled some telling survey numbers to illustrate just how pessimistic consumers have become.

"About 46 percent said they will spend less overall, with 34 percent reducing dining out and 25 percent cutting back on 'little luxuries' such as trips to the coffee shop, manicures and high-end cosmetics," the Tribune reported over the weekend. "Among those making less than $50,000 a year, 23 percent said they would spend less on groceries."

If the automatic cuts do go into effect as is, we could see even more cautious consumers headed forward…

So will we see a new and improved, last-minute deficit-reduction package before the March 1 budget cuts go into effect?

It's difficult to say.

But as this new deadline approaches, don't assume it will send stocks reeling. Sometimes, all the market needs is a little certainty.

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April 23, 2013 at 2:38 am

Thank you for the update. I will use for sure your resources in the near future.

April 23, 2013 at 2:38 am

Thank you for the update. I will use for sure your resources in the near future.

February 28, 2013 at 7:37 am

Very informative and helpful. Thank you for helping me understand the sequester.

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February 28, 2013 at 12:52 am

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Detroit Dom
February 27, 2013 at 10:45 am

For those who wish to blame the Republicans - go get a Civics lesson. The Senate, led by Harry Reid-DEMOCRAT, has failed to approve a Federal Budget for the past three years. BTW: This is a Constitional requirement. This year, the House, led by John Boehner-REPUBLICAN, is finally holding the Senate's feet to the fire and demanding they produce a Budget.

The Obama-DEMOCRAT budget plans given to the Senate have not received a single vote of approval. At least the budget plans submitted to the Senate by Paul Ryan (REPUBLICAN) received some approval from Democrats and Republicans, meaning the hold some merit, whereas the President's plans do not.

This Sequestration is actualy a good thing because:
- it forces the the Federal Gov't to cut their spending.
- it will make people realize the sky will not fall.
- prove our Federal Government can operate with less.

How many of us have cut our household budgets to make ends meet?! Thanks to Obama, we all had our tax obligations raised 2% this year giving us 2% less in our pockets. If we are forced to live with 2% less, then so can our Federal Government!

Some of you are correct - let's fire some of these Congress people and let's start with those that have NO understanding of basic Economic Principals.