What Does the Sequestration Mean for Investors?

    Text size

After months of bitter debate on Capitol Hill, claims and counterclaims and predictions of impending economic doom, sequestration arrives at last Friday, barring an unexpected last-minute deal.

And thus far, the markets seem to have pretty much shrugged off the impending $85 billion in automatic spending cuts.

Indeed, the Dow Jones Industrial Average soared to near-record levels Wednesday, ending the day up 1.25% to 14,075, while the S&P 500 and the Nasdaq also posted more than 1% gains.

This despite warnings from U.S. President Barack Obama and other Democrats that sequestration would send the economy back into a recession and possibly cost 1 million Americans their jobs. The president has been warning that the across-the-board cuts could force the government to cut back on services including law enforcement, air-traffic control and food safety inspections.

"These cuts are wrong. They are not smart. They're not fair. They are a self-inflicted wound that doesn't have to happen," President Obama said Wednesday at a shipyard in Newport News, VA, where scheduled maintenance to the aircraft carrier USS Abraham Lincoln has been delayed by the budget crisis.

But Republicans accuse the president of exaggerating the impacts of the cutbacks as he tries to pressure lawmakers to close tax loopholes.

House Speaker John Boehner, R-OH, called on members of the Senate to get off their [behinds] and enact legislation to reduce the impact of the cuts.

For all the finger-pointing, though, the two sides haven't negotiated on ways to avoid sequestration for weeks, and it appears unlikely a meeting scheduled for Friday between President Obama and congressional leaders will avert sequestration.

Money Morning Global Investing Strategist Martin Hutchinson says when it comes to cutting the budget and reducing the deficit, Washington's got it all wrong.

Hutchinson said the sequester should have been part of a sweeping deficit-reduction plan that would also include the recent tax increases, reductions in entitlements and reforms to the tax code.

"If you did those four things, you would have got rid of the deficit," Hutchinson said. "The problem is, I don't think the president really wants to do that."

What the Sequester Means for Investors

As an investor, you need to pay attention to the market reaction if and when sequestration begins.

But it's not the cuts that will hurt markets; it's the political bickering that led us here that will lead to a loss of confidence and ensuing decline in stock prices, Hutchinson said.

"Unfortunately, what I think is going to happen is the administration is going to make it ugly as possible and close down all those bits of the government that the public doesn't want to close down and have a great political battle about it," Hutchinson said. "That will undoubtedly affect confidence and have an effect on investments."

If another unnecessary political battle sends the markets into a nosedive, there is a way for you to protect your money.

Watch the accompanying video to see Hutchinson outline the sequester's impact on the economy and how to protect your investments.

Related Articles and News: