NEW YORK - With less than a week to go before $85 billion in automatic government spending cuts kick in, Wall Street is holding its nerve.
The Dow Jones industrial average has gained 6.8 percent since the start of the year as investors largely ignored the latest installment of Washington's budget drama. The Dow Jones climbed close to its record level at the start of the month and the Standard & Poor's 500 notched up a streak of seven straight weeks of gains, before easing back last week. It's still up 6.3 percent this year.
Wall Street is betting that the cuts, which the Congressional Budget Office estimates will take 0.6 of a percentage point of economic growth this year and cost 750,000 jobs, won't be enough to derail the recovery. Investors may also have become used to Washington brinkmanship, having seen last-minute deals brokered after a series of standoffs.
David Bianco, chief U.S. equities strategist at Deutsche Bank, says the automatic spending cuts could actually be a "net positive" for stocks, despite the drag that they would put on the economy.
That's because a set of known, measurable spending cuts is better than no budget reduction at all.
"Significant spending cuts are needed," Bianco says. "Until that happens, people are going to worry that this is still a problem that needs to be solved."