Moody’s Analytics (MCO) chief economist Mark Zandi expects the rest of the year to be a bit of drag as the full impact of sequestration will hit in the summer, sucking precious wind out of an already slow-growing economy. Zandi expects the fiscal cuts to shave 1.5 percentage points from GDP this year, reducing growth from a potential 3.5% to Moody’s estimate of 2.0%. The fiscal cutbacks are expected to smack the jobs market hardest between July and October. In other words, between now and late 2013 blue skies will be harder to come by.
But Zandi says the skies could very well clear by year-end. “Assuming nothing goes badly awry and there are no additional major changes to near-term fiscal policy, the recovery will regain momentum going into 2014. The fiscal headwinds will lessen by more than half and all but fade away by 2015,” Zandi wrote in a recent commentary.
For investors, the common take is that the stock market is typically a good six months ahead of the economy. But so far, the market has yet to price in any second-half economic malaise, as the S&P 500 is up more than 14% year to date.
Moreover, as Zandi points out, there’s still the chance that the debt-ceiling debate could once again take center stage. The latest estimate is that we’ll reach the debt ceiling sometime around Labor Day. That’s part of the “badly awry” awry he refers to, with Europe’s continuing work-out also an ever present wildcard on the global stage.
For those with shortish memories, when there’s a hint of “awry” the markets are not humored. In 2011 the stock market advanced more than 7% through the first five months of the year, but then as the Washington kabuki began to play out over how to deal with the debt ceiling limit, Wall Street got serious jitters as politicos were seen as doing their very best to derail the still young recovery.
The next round of angst came post-2012 election as Washington wrestled with another debt ceiling limit and the looming cuts from the sequestration deal that was part of the 2011 debt limit compromise. For the last two months of 2012, the S&P 500 was essentially flat, but as this chart shows, living through it was no easy stroll, as market volatility (the VIX index) spiked.
During the worst of the stretch-from Thanksgiving through New Year’s the VIX rose nearly 50%.
All that makes a pretty decent case for taking at least some profits today. The S&P 500 has advanced 20% over the past 12 months and is up nearly 50% since late 2011. Reallocating into the less loved sectors that should benefit from stronger economic growth heading into 2013 -- the info tech sector and the energy sector both trade at below-market price/earnings ratios -- or even stashing some cash on the sidelines to make pouncing easier when the next correction comes could be the smart way to position yourself for what is expected to be sluggish economic growth the rest of the year.
This look at tech stocks with attractive dividends, and dividend growth, featured CA (CA), Harris (HRS) and Corning (GLW). This article on Bill Nygren’s tech favorites focused on Apple (AAPL), Intel (INTC) and Microsoft (MSFT). This article on Berkshire Hathaway’s cash pile (BRK-B) suggests that some smart investors are content to wait for bargains.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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