Pioneer Investments’ chief investment officer, Kenneth Taubes, and Potomac Research Group’s Greg Valliere agreed Tuesday that the sequester cuts due to take effect March 1 would have little effect on the U.S. economy and the markets.
Speaking on a conference call with advisors, one of a series hosted by Pioneer, Taubes first addressed the potential drag on the economy from the sequester’s scheduled $85 billion cuts in discretionary spending, pointing out that even with those cuts “total spending will still be up $14 billion” in the current fiscal year, “so we’re talking Washington math”—Instead of “actually, really cutting, they’re spending less than anticipated.”
“From a GDP perspective, it just has less of a positive impact,” Taubes said, “it won’t cut GDP but will slow down growth of GDP.” Putting the $85 billion in cuts into a broader perspective, Taubes said that “on a $16 trillion economy, we’re just talking about a reduction in the rate of growth; mandatory spending continues to grow at unsustainable levels. I don’t view this as an economic disaster, and the markets aren’t terribly concerned with it.”
Going beyond the budget numbers, Taubes admitted “we’ve got a lethargic rate of growth,” owing in large measure to government spending cuts on both the federal and local levels.
In the private arena, however, he said “we’re in fourth year of recovery, and only last year did we see the interest-rate-sensitive sectors start to rebound, like autos.”
He further pointed out that auto sales remained on a healthy track so far this month, despite “higher gasoline prices and FICA cut.” Among those higher sales are pickup trucks, which Taubes laid to the recovering housing market.
“Housing continues to improve every recent month,” he said. “I suspect we’re beginning to be average or slightly below in inventory” of housing, while companies like Lowes and Home Depot are seeing better earnings “on the back of a recovering housing industry.”
Returning to the possible drag on GDP from sequester cuts, Taubes said the improving employment situation may “well be ameliorated by higher employment and salaries.”
As for other economic issues, Taubes projected that as corporate America was “feeling more confident,” that mergers and acquisitions—some of which we’ve seen already this year, such as Heinz and American Airlines—would “have a big impact” on the economy.
As U.S. companies “are beginning to feel their oats,” and since corporate managers are “compensated on equity returns,” Taubes said that there would be “continued pressure to improve” those equity returns at their companies. Combined with “very low” financing rates and with credit markets being “more lenient” than is commonly perceived, he expects to see “an increase in M&A and companies will be big buyers of their own stock.”
Looking overseas one day after the Italian elections, Taubes said, “every single poll says people in the [eurozone] peripheral countries want to remain within the euro.”
What does he read from the Italian election? “Italians are saying we want the euro but we need to see some easing up on the fiscal tightness.