Economic Outlook Continues to Improve but Sequester Can Spoil the Party

It has been a solid start for the U.S. economy in 2013. Thanks to last-minute congressional budget deal which averted the U.S. economy falling off from ‘fiscal cliff’, U.S. equities have witnessed a rally thus far in 2013.

The Dow Jones has gained nearly 7 %, S&P 500 Index is hovering consistently around 1500 mark – with both indexes tad short of all-time highs. Most Wall Street bigwigs have handed better than expected results. Barring U.S. GDP data for the fourth quarter of last year, which showed unexpected contraction in the economy, all other economic indicators, especially the labor market have underpinned marked improvement in the economy.

On Friday string of encouraging economic data triggered solid gains across-the-board with all leading benchmark indexes climbing more than 1%. While the Labor Department said that non-farm payrolls increased by 157,000 in January, just short of economists’ consensus forecast for 160,000 new jobs additions, Reuters/University of Michigan’s revised consumer sentiment index, the construction spending index along with Institute of supply Management’s (ISM) data on factory orders —all pointed towards a rebound in the world’s largest economy. Automobile sales climbed 14% in January from the same period of last year.

Moreover, the euro zone debt crisis has finally shown signs of abatement. Earlier this month, the ECB said that hundreds of banks that owed money to the central bank, borrowed at the beginning of the 2012 at the height of financial crisis, will soon repay the money, a sign that financial markets have stabilized. World’s economic growth engine, China has also showed signs of economic rebound.

Now, with handful of quarterly reports lined up for this earnings season and no major economic report slated to be released week, it’s hard to imagine any stumbling block which could cause stock market to retreat in the coming week.

Unfortunately the threat of sequester is looming over the U.S. economy and with next week light on economic data front, investors’ spotlight is likely to shift towards budget talks—and it can weigh on the market sentiment.

Even though some economists are expecting the U.S. economy to wither the aftereffects of sequestration, investors and business leaders will remain anxious and this is likely to rise as we approach towards March 1 deadline.

“Next week my biggest fear is it’s such a low news week that we may shift our focus to “sequester cliff” and those budget negotiations in Washington,” said Art Hogan of Lazard Capital while speaking to CNBC.

Concerns are justified as automatic cuts or sequester have the potential to derail the economic momentum.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.