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Current Views

February 27, 2013: Thoughts on the Sequester

Thoughts from Our Domestic Equity Team

As we approach the end of February it is becoming increasingly likely that the federal spending cuts commonly known as the sequester will go into effect as scheduled on March 1st. Media reports have indicated that there are no serious negotiations currently taking place, so a last minute deal appears unlikely. Many economists estimate that the spending reductions will reduce current year’s GDP by approximately one half of a percentage point. Clearly this is not ideal for an already challenged economy which stagnated over the final quarter of 2012.

That being said we do not believe that this will create a large enough headwind to send the economy back into recession. The corporate sector is in relatively good shape, as evidenced by a stronger than expected fourth quarter earnings season, the recent spate of M&A activity, and the latest PMI survey which indicated that manufacturing continues to expand. This strength has helped support consistent employment gains over the last several months which might explain why consumer confidence has been trending positively.

The sequester will likely act as a drag on economic growth, but we view it as an obstacle which can be overcome as opposed to an unmitigated disaster. Most investors have given up hope that the cuts will be averted, which can be seen positively in that the market will not be taken by surprise. While it is always dangerous to assume that bad news is fully priced into the market, and it is certainly possible that the sequester taking effect will negatively impact stock prices to a degree, our opinion is that a precipitous decline as a result of this is unlikely.

Submitted by: Jason Sheer, CFA – Portfolio Manager

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