case for sequestration's impact.
WASHINGTON, DC-Within a week we will know the results of presidential election, absent another replay of the disputed 2000 election as some pundits suggest may happen. Even assuming we have a President Obama or a President Romney on Nov. 6, the guessing game about the financial direction of the country will still be on. That is because as of right now, sequestration–a component of the Budget Control Act of 2011—is set to go into force with across-the-board cuts in most spending areas.
Only a last-minute reprieve by a lame duck Congress can stave it off. Wall Street is counting on this happening, but LPL’s chief market strategist Jeff Kleintop in Financial Advisor magazine points out that if emotions are running strong after the election Congress might refuse to forge a solution.
For those that have been assuming Congress will pull a rabbit out of the hat, this is what life will look like under sequestration: Federal discretionary spending could drop as much as 12.1%, according to Jones Lang LaSalle. Special exemptions have been made for the Department of Veterans Affairs, Social Security, Medicaid and military employee pay, but every other category—including and especially defense, with $492 billion targeted—is slated for a spending haircut. Indeed a case can be made that a resolution to sequestration is more important to the country’s financial future than who wins the election.
Consider, for example, health care. Conservatives are determined to see the end of President Obama’s health care reform act. However, an analysis by Morningstar, reported in Advisor One, concludes that a President Romney will be unlikely to repeal the health care law. In addition, Morningstar said that health care stocks will be more likely impacted by budget sequestration.
The Washington, DC area will be similarly impacted, a recent report by SNL Financial finds. For months now, area tenants have been in “wait and see” mode. SNL gathered evidence and made a compelling case for the ramifications of sequestration. It noted that:
- In October, Bill Loomis, Stifel Nicolaus managing director for aerospace, defense and government IT, said defense and government services and “the government itself” are starting a “potentially 10-year downcycle at least.”
- In September, John Germano, executive managing director of CBRE‘s Washington-Baltimore region, said the “threat of federal budget cuts” and other economic challenges have kept the office market throughout Washington, DC, “flat” and “defense contractors in particular are postponing signing leases” until the election is over and budget decisions are made.
- In July, analysts from Sandler O’Neill said that after the election, “folks are expecting the pause to continue another 12 to 18 months before demand starts up again” due to the “looming fiscal cliff and sequestration.” They said it is the first time in recent memory that “both the private and government sectors are down and out.”