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Is the equities party about to end, or at least start to wind down? Uncle Sam tried to nudge revellers towards the door, in the name of deficit reduction – raising payroll taxes by two percentage points in January, and imposing across-the-board $85-billion (U.S.) spending cuts, known as the "sequestration," at the end of February. If March was last orders, it was a fine hurrah as the S&P 500 rallied 4 per cent.
Now, though, we have reached first-quarter earnings season, so the lights are about to be turned on and the damage assessed. Delta Air Lines, in reducing first-quarter guidance this week, attributed weaker-than-expected March revenue to the sequestration reducing government travel, as well as to customers staying home due to continued fare increases.
Companies that have underperformed now have a tidy explanation. But excuses may not stop investors from leaving the party.
Delta continues to project a profitable quarter. Ideally there will be more of that as companies report: The new-found attention to fiscal discipline will lead the market to switch the music to something more mellow, instead of rushing for the exits.
The Congressional Budget Office estimated in February that the austerity measures would not sink the economy into a recession this year, but rather would cut output growth by half, to 1.4 per cent. The next tea leaf to be read will be on Friday when the unemployment rate, projected to remain at 7.7 per cent, is released.
The question now is whether the pain, even if limited, is worth it. As of now, the sequestration seems to have hit an unhappy trifecta: restraining a recovering economy, doing nothing to address long-term budget problems, and leading to the perverse symbolism of President Barack Obama returning a portion of his salary. He should have proceeded directly to the mall – or the Delta website – and spent the full amount.