Weighing The Week Ahead: Hope For A Budget Compromise?
Jeff Miller | Feb 10, 2013 05:26AM ET
Sometimes the week ahead, despite our relentless focus on markets, brings policy issues to the fore. Such was the case during the fiscal cliff countdown, and it is happening again.
I have strongly advised that investors remain agnostic about politics. It is more profitable to accept the reality of current policy. Figure out what investment is best for the times. For this reason I rarely opine about policy. I often identify what is most likely to happen, and which outcomes are market-friendly.
In this spirit I suggest that investors should be monitoring the slow and laborious process toward a compromise that will avoid the impending spending sequestration. Until now I have refrained from writing about this issue. Why this week? Two things.
- It will be a light week for other economic data, leaving plenty of media space and time to fill. My mission in the WTWA series is to forecast what will be on the agenda.
- The State of the Union speech might offer some real hints -- if you know what to look for.
Sequestration was adopted originally as part of the resolution to the 2011 debt ceiling impasse. The Budget Control Act of 2011 (Congress is great at misleading names for bills!) created a vague but hopeful in their comments. Obama has earlier stated that the sequestration cuts would not occur. I will be closely watching Tuesday's speech for signs of flexibility and bi-partisanship.
Investment Conclusion
I anticipate plenty of SOTU discussion on Wednesday. The challenge will be to sift through the partisan commentary.
Avoiding sequestration would be bullish for the overall market. My guess – and that is all that anyone can do right now – is that observers see this as a 50-50 proposition or worse.
Specific sectors that would be helped relate primarily to defense stocks, a group that I'll be watching closely. (Northrup Grumman (NOC), Lockheed Martin (LMT), and Raytheon (RTN), are candidates).
Disclosure: Currently long hedged positions in NOC and RTN for some accounts.
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