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Budget Control Act of 2011

08/03/2011

On Tuesday, August 2, 2011, President Obama signed into law the Budget Control Act of 2011 (BCA). Equity investors reacted with marked skepticism by continuing to shed risk and sending the S&P 500® Index (Fig 1.1) below the December 31, 2010 closing price of 1257.64 for the first time since March 16, 2011.
 
The debt ceiling increase takes us to the end of 2012 before this issue must be addressed again. The 2012 presidential election electorate will ultimately decide how meaningful deficit reduction and the austerity path are. In essence, budget gridlock was certified with the BCA signing, not necessarily a favorable condition for the equity markets.
 
Whether or not Standard & Poor's rating agency has the wherewithal to lower the U.S. credit rating remains to be seen. S&P would stand alone with a downgrade as Fitch and Moody's confirmed they will not. The evidence is clear to anyone with a calculator that the BCA doesn't come close to the desired $10 trillion deficit reduction over 10 years that the S&P has suggested the U.S. budget is in need of.
 
Consumer confidence (Fig 1.2) is measured on a monthly and, in some instances, a weekly basis. The past eight days of selling is evidence that Investor confidence is at its lowest level for 2011. Investor confidence is measured by the near-term direction (Fig 1.3) of the S&P 500 Index.
 
I expect incumbents to quickly understand that ominous investor confidence message and to begin working on forms of fiscal stimulus. Although the BCA did not extend the payroll tax cut, I place a high probability on that extension in the next 60 days. In addition, the fiscal stimulus via repatriation of overseas profits and an employer payroll tax cut will also be considered. Hopefully, D.C. transitions quickly from the "villain" role. For a reminder of what that would take, reread my June 1, 2011 blog, "
Baseball Season of Frustration 2."  
 
Fig 1.1 S&P 500 Index


Source: Bloomberg
 
Consumer Sentiment, March 31, 2007 to July 31, 2011


Source: Bloomberg
 
Fig 1.3 S&P 500 Index, June 1, 2011 to August 2, 2011


Source: Bloomberg
 

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