Sequester hits, Wall Street yawns

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March 4, 2013, 7:55 pm
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(NECN: Peter Howe, Boston) - In the days before the automatic budget cuts called the “sequester” hit Friday, many officials from President Obama to governors to congressional leaders warned the $85 billion in automatic spending reductions would be painful, even devastating.

“This is going to be a big hit on the economy,’’ Obama said in one of several pre-sequester appearances last week, warning that Republicans refusing to accept tax hikes to stave off the sequester were putting “hundreds of thousands of jobs and our entire economy at risk.” Senate Majority Leader Harry Reid warned of “devastating cuts.”

But then the sequester hit on Friday, and since then, a funny thing has happened on Wall Street: Nothing.

Monday, the Dow Jones Industrial Average rose 38 points, about 0.27 percent, after rising 35 points Friday, even as it became clear that day there was no hope of Washington escaping sequester.

“I think the market understood that this was quite likely going to happen,’’ Michael Tyler, chief investment officer with Eastern Bank Wealth Management, said in an interview Monday afternoon. “The fact that it didn't respond particularly violently, but was actually pretty calm today and calm on Fridaym, says that investors expected it. It's not that big a deal.’’

Especially not, says John Morris, managing partners of Crestwood Advisors in Boston, when compared to the warnings. “I think all the scare tactics, and then the reality being just not an emergency where [for example] everybody's having to wait at the airport for three hours, is turning out to lead people to say: ‘OK, let's face facts.’ ‘’

“We seem to just be looking beyond all these immediate crises,’’ Morris said. “Investors are looking, really, and valuing the market and saying things look reasonably priced,’’ which means no wild swings in market indices.

If the sequester is being taken as a yawn by the overall stock market, in the defense sector –- locally, including companies like Raytheon, United Technologies, General Dynamics, and BAE Systems –- there are also some fears that as the Pentagon cuts are implemented, they could have a big impact – but even then, some stock pickers are looking for signs of a market overreaction and a buying opportunity. “Who knows where they could bottom, but as they get cheaper it's certainly an area that we will spend some time looking at,’’ said James Bacon, a Crestwood director who analyzes defense-sector stocks. “We certainly will be looking closely to see if there are any good opportunities.”

Tyler said compared to the “fiscal cliff” negotiations in December, the important difference with the sequester is that that affects, overall, at most 0.5 percent of the U.S. gross domestic product, while the fiscal cliff negotiations involved tax increases and spending cuts totaling closer to 4 percent of GDP, which meant the fiscal cliff carried the threat of conceivably plunging the U.S. back into recession. This time around, the Chicago Board of Trade VIX volatility index remains close to five-year lows, indicating few investors have any fear about the sequester cuts taking effect.

“This is not going to throw the economy into a recession,’’ Tyler said. “This is not what I would call a freak-out moment. This is ‘steady as she goes.’ There's a small blip, a small hit to government spending, which is not huge in the context of total government spending. It will have some impact on the economy, but it won't be huge, and I think the investors and our clients are recognizing that.’’

With videographer Mike Bellwin and assisting videographer Jason Marder.

Tags: economy, Wall Street, Peter Howe, John Morris, budget cuts, Crestwood Advisors, Sequester
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