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Pros and Cons: What the Status Quo Budget Deal Means for Markets

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Republicans and Democrats put down their political weapons yesterday and found a sliver of common ground big enough to hold the first bi-partisan budget in more than two years.

House Budget Committee Chairman Paul Ryan (R-WI) and Senate Budget Committee Chair Patty Murray (D-WA) announced the compromise that would avoid cuts to defense and domestic discretionary programs that were on the chopping block under the sequester plan. It does not, however, tackle hot button issues like entitlements and taxes.

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“We spent the last two years bemoaning the fact that there’s no conchord in congress for any kind of budget compromise,” says Zach Karabell, head of global strategy at Envestnet. “The market reaction which had been hysterical in the face of the absence of [compromise] is placid and...not very interested in the face of it actually happening.”

Karabell says the real win here for markets, the economy, and America at large, is the fact that someone in Washington was able to find a compromise and end the dysfunction. “To the degree that that may be off the table going into 2014... you have to at least look at that as the absence of what had been rather destructive noise.”

Still, the Envestnet strategy chief acknowledges the deal is far from perfect. “They essentially said ‘we are really not able to make bigger decisions about medicare or medicaid or about taxes, so we’re just not gonna do that.’”

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As for the plan's many critics Karabell notes, “the sticking points are it essentially locks in present tense reality,” something that leaders on both side of the aisle have said simply can’t last.

“If you think we’re going down the path of escalating deficits... this particular deal doesn’t change that at all,” Karabell continues. “If you think that the economy will begin to expand... and tax revenues will go up and the deficit will then shrink by virtue of growth, then this deal doesn’t change that either.” 

When asked whether the current framework will pass through Congress and become law, Karabell says it’s a toss up. If it does, he says, there is one more silver lining to the deal. “I find it hard to believe that Congress, if it does pass this bill, will then go ‘Oh we’re not gonna raise the debt ceiling on spending that we actually passed.’”

Finally, Karabell notes that should the deal, or one like it, take budget battles off the table in 2014 the focus for the upcoming midterm elections will then shift to other big money hot button issues like health care spending.

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