Uncle Sam and the Fed hint at spending less

By - Last modified: March 4, 2013 at 11:01 AM

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My clients routinely ask me whether the market is going to move up or down this year. My answer is always "yes."

That is what markets do; they fluctuate. And nothing seems to get Wall Street going more than the idea of our government spending less.

Two pieces of spending news to keep your eye on over the next few weeks are the looming federal budget cuts and the Fed’s recent hints at suspending quantitative easing.

During the budget debates in 2011, Congress agreed to disagree on budget cuts, opting instead to address the cuts in 2013. When the topic came up again this past January, our elusive leaders again agreed to put off the decision until March 1, 2013.

Remembering how negatively the market responded to Congress’s indecision back in 2011, bullish investors should hope that they can come to a more prompt decision this time around. Regardless of their ability to make up their minds expeditiously or not, I’m not convinced any cuts that result would have a positive effect on our economy or the markets overall.

Last week, the Fed hinted at the idea of suspending its bond-buying program (otherwise known as quantitative easing). This currently amounts to $85 billion dollars a month of bond buying designed to lower unemployment. The goal was to continue the program indefinitely, until our unemployment rate fell to 6.25 percent. However, some inside the organization want to end the bond-buying spree early.

Just the idea of suspending the program seemed to have a negative impact on markets around the world. Imagine what might happen if they actually killed the program. Has quantitative easing been the main impetus behind our recent market uptick? If so, could it drive markets down if the Fed pulls the plug?

With the threat of federal budget cuts and the possibility of ending quantitative easing, I expect we’ll see considerable movement in the market. My advice is to make sure you are prepared for a market that moves both up and down, because that's what markets do. Talk to your adviser to make sure you are well positioned to take advantage of these movements if and when they occur.

 

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