Guest post by Kris Sayce from Money Morning Australia
What did we tell you a few weeks ago? It’s impossible for the stock market to move up or down until the Wall Street whiz kids and mainstream media create a new catchphrase.
‘Debt ceiling’, ‘fiscal cliff’, ‘credit crunch’, and ‘Grexit’. You’ve heard them all. Each time one of those terms rears its head, the market falls. Then soon enough someone finds a ‘solution’ and stocks roar again.
Well, it looks as though we’ve got a new excuse for stocks to fall. And this one is the scariest of all.
It’s ‘The Sequester‘.
What does it mean and should you worry about it? For an explanation of The Sequester, here’s the Washington Post:
The sequester is a group of cuts to federal spending set to take effect March 1, barring further congressional action.
The sequester was originally passed as part of the Budget Control Act of 2011 (BCA), better known as the debt ceiling compromise.
It was intended to serve as incentive for the Joint Select Committee on Deficit Reduction to come to a deal to cut $1.5 trillion over 10 years. If the committee had done so, and Congress had passed it by Dec. 23, 2011, then the sequester would have been averted.
In short, the US Congress and Obama Administration need to agree to cut a bunch of government spending, raise taxes, or both. If they don’t then it means a total of USD$85.4 billion in mandatory cuts spread across defence, discretionary spending and Medicare.
So, they’ve got just about a week to figure things out. Will they? Or will you see history repeat itself? Here, let us explain…
Stocks Fall Again, Will They Rise Again?
Last Thursday the Australian share market dropped 118.6 points…or 2.3%. Investors are worried. They’re worried the US Federal Reserve may turn off the money tap. If that happens the stock market will have to fend for itself.
Add that to The Sequester and you’ve got a recipe for a stock sell-off.
As we said at the start, the market and mainstream investors are so insecure that they can’t buy or sell anything without an excuse. They need a big macro-economic disaster…and they need to give it a name.
They’ve done that before. So many times we’re bored of it. Here’s a chart of the US S&P 500 going back to 2007. We’ve overlaid data from Google Trends. The marks on the chart indicate the point at which each phrase reaches the peak in news headlines:
Click here to enlarge
Source: Google Finance, Google Trends
You remember the ‘Credit Crunch’. Headlines containing that phrase peaked in October 2008. The fear of a Greek exit (‘Grexit’) from the European Union peaked in May 2012.
And the Fiscal Cliff hit a crescendo in December…just before US stocks bagged a 9% gain in four weeks!
Each of these phrases has something in common – a short shelf life. The media reaches a frenzy,stocks sell-off and then…that’s right, politicians reach a bogus deal and the crisis is over…until the next crisis arrives.
That’s where we are with ‘The Sequester’…
That’s where we are with ‘The Sequester’. Use of the term has gone sky-high since the start of the year. Check it out for yourself on Google Trends (and sign up for Google+ while you’re there so you can follow our commentary throughout the day).
But we’re prepared to bet that you’ll see another eleventh-hour squib of a deal and they’ll avert the crisis…until the next time anyway. And you can guess what will happen then: stocks will take off, as we dare say part of the deal will involve more spending and/or more money printing. And if we’re wrong? That’s why we hold dividend-paying stocks for income, cash for safety and gold for insurance. This volatility and fake crisis solving is why we’ve gone on so much about spreading your money around into various asset classes. If you’ve followed this advice, then yesterday you should have just sat back and enjoyed the view.
Just because politicians and everyone else is irrational, doesn’t mean you have to be.