Sequester Will Slam Brakes On Any Momentum Economy Might Have Left

 

Better three hours too soon than a minute too late.” — William Shakespeare

 

In spite of the fact that the market has been hitting record highs recently, the deep disconnect between Main Street and Wall Street, accelerated by the budget cuts known as the sequester, will likely cause the Bulls to retreat in a serious way within the next couple of earnings seasons.

The U.S. economy is, after all, predominantly consumer-driven. And the impact of the cuts that were implemented at the beginning of March will begin to be felt exponentially as more and more of the sequester goes into effect throughout the remainder of 2013.

The inevitable result will be that consumers will put a cork in the spending spigot, which hasn’t exactly been cranked up to anything close to a high level for quite some time. True, consumer credit expanded to its highest levels in over five months, from over $16 billion to $2.79 trillion, with the majority of that going to big-ticket items like cars and student loans. But those numbers are likely to deflate fairly quickly upon a collective national perception that a new round of economic pain could be looming close on the horizon.

Think of it like this — there are reputedly more than one million federal workers who could be losing something in the neighborhood of 5% of their pay due to sequester-mandated pay cuts. So that might mean one less restaurant meal here, one less family outing there, a postponed nonessential purchase just about everywhere.

Will that impact businesses in the Consumer Goods Sector, the Tech Sector, the Consumer Services sector? You bet.

Sooner rather than later, this will hit a number of corporate bottom lines, and that might start to be seen as soon as Q3. If negative earnings reports, which were basically neutral for Q1, start to dovetail with weak economic growth data, such as that seen during last week’s weaker-than-expected numbers in the labor market, then Wall Street will be brought back down to earth by the reality of economic woes on Main Street.

Will the sequester really have a substantial negative impact on the economy? Hard to say for sure, but could be said with a certain degree of likelihood. Consider a recent Google search of “Will the sequester hit the economy hard?”

“New Jersey to be hit hard by sequester’s cuts to Medicare”

“Science and research hit hard by U.S. sequester cuts”

“Sequestration to hit maritime economy hard”

“Sequester will hit college graduates hard”

“Sequester will hit Illinois harder than average”

This sort of trend will inevitably hit multiple sectors, as there will simply be less consumer money to go around. Wall Street, which to a certain extent could be seen as a lagging indicator in terms of the health of the economy in general, as opposed to corporate health, will likely see missed estimates and poor earnings growth.

Investors, in turn, could start looking at lower stock prices as something less then a buying opportunity, which has predominately been the case during most of the year so far, and more of an opportunity to take profits off the table and an excuse to start seeking out more risk-averse investments.

So the whole “sequester thing” could be regarded as a somewhat foolish state of affairs, especially when considering that it was never actually supposed to go into effect. It was, originally, nothing more than a politician’s game, a negotiating ploy, a card that was never really supposed to be played.

But it did get played. And here we are.

Should the sequester become the factor that knocks off a chunk of both the GDP and the equity market, it will be a rather fitting statement as to the foolishness of our elected officials and probably, at least politically speaking, as an appropriate epitaph on more than one politician’s career.

Hopefully, it won’t become an epitaph for the domestic economy.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. Continuing a nearly yearlong trend, the Technology Sector continues atop the SectorCast leaderboard, though most of the leaders on this list suffered losses for the week.

Here is the current list of some of the top performing Technology Sector ETFs year-to-date, as of the first week of April:

SOXX — iShares PHLX SOX Semiconductor Sector Index Fund, +9.09%

FDN — First Trust Dow Jones Internet Index Fund, +7.47%

FXL — First Trust Technology AlphaDEX Fund, +6.64%

QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +6.31%

IGV — iShares S&P GSTI Software Index Fund, +6.17%

SMH — Market Vectors Semiconductor ETF, +5.88%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by either Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.