The market doesn't like the new budget deal -- because it might be good news.
Bad news is bad news until good news becomes bad news.
That pretty much sums up the markets as of late. Case in point: When a budget deal between Republicans in the House of Representatives and Democrats in the Senate was first announced earlier this week, stocks dropped from their near-record highs. After peaking above 1,811 on Monday, the benchmark S&P 500 index closed Thursday at 1,775.50.
To be sure, the budget deal wasn't much of a radical change, even though it was the first deal cut by a divided congress in three decades; it reversed cuts implemented during the "sequestration" by only $45 billion to $1.012 trillion in 2014. A summary of the deal touted that "the agreement would reduce the deficit by between $20 and $23 billion."
To put it in perspective, the projected deficit was expected to be $750 billion in 2014 before the deal. That means that even in a best-case scenario, that's only a 3% reduction in the deficit. And, the total US debt is over $17 trillion.
But, the markets didn't sell off because it thought the deal cut too little – or even too much. Instead, stocks were sold because investors saw a fiscal resolution as a possible impetus for the Federal Reserve Bank to taper its $85 billion monthly monetary stimulus at an earlier-than-expected date. With less money being printed by the Fed, stocks could potentially be hit, think some investors.
"This is the problem with a policy-driven market and too much reliance on government," says Steve Cortes, founder of Veracruz TJM. "On balance, I think it's good for stocks. Why? Because stocks in general have liked big government and they've liked government spending."
Cortes believes stocks doing business with the government will benefit most, primarily defense contractors. "Lockheed Martin is my favorite of that group," says Cortes.
For Jeff Tomasulo, managing partner at Belpointe Alternative Investments, the markets as a whole have now hit a critical point. "We are at support," says Tomasulo, referring to the current price level around 1,775.
"If it breaks under there, we could see some sell-off," says Tomasulo. "With that said, I've been saying that since October."
"Every time we get a 1% to a 1.5% pullback in the S&P, we snap right back."
To see what level Tomasulo says makes the market a buy – and which one makes it a sell – and to see more of Cortes' analysis of the budget deal means for the markets, watch the video above.
More from Talking Numbers:
- Budget, Tax & Economy