Market yawns as sequester kicks in

The stock market actually rose last week as it became apparent that Congress would miss a deadline for preventing $85 billion in automatic spending cuts. It even managed a small gain on Friday, leaving the Dow Jones industrial average just 75 points below its record high on the day the cuts officially kicked in.

The bond market, where Uncle Sam raises the money to support his spending habit, has been placid too. Even the major defense contractors, which have a lot of money at stake in the sequester, haven’t seen their stock prices take a hit. Boeing shares, for example, are up 3 percent in the past two weeks.

Why the nonchalance?

First, investors are used to Washington’s brinksmanship. Congress and President Barack Obama resolved the fiscal cliff without doing too much damage to the economy, and they agreed on a temporary increase in the debt ceiling. There’s still a chance that they’ll reverse some of the cuts before they bite too deep.

Second, the economy seems to be strong enough to absorb these cuts. The $85 billion at stake in the sequester is a lot less than the $500 billion fiscal cliff that we avoided at the beginning of the year. The sequester is bad policy and will sap some of the economy’s strength over the next six to 12 months, but unlike the cliff, it isn’t enough to throw the U.S. back into recession.

“We know the spending cuts are going to hurt particular people, but will they hurt the overall economy?” asks Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis. “Probably not as much as people thought.”

The recent economic news, he noted, has mostly been good. Manufacturers’ orders are increasing, housing starts are up sharply and job creation has been steady. “This could end up being a good year if we can get past the political hurdles and focus on the underlying strengths,” Thayer said.

The market could still change its mind about the sequester. We could see a sell-off as government workers start to take furloughs and essential services are curtailed. However, money manager Joe Terril doesn’t even list it among his top worries right now.

If the stock market tanks, he says, it’s more likely to be because of a spike in inflation, economic problems in Europe or unrest in the Middle East than because of U.S. budget problems.

“A little issue like the sequester is not going to send the economy into any kind of catastrophe,” says Terril, president of Terril & Co. in Sunset Hills.

Calling the sequester “little” probably wouldn’t make Terril very popular at a Washington cocktail party, but other investors seem to agree with him.

Their ho-hum reaction, unfortunately, can’t answer the what-if question: How much better might the economy, and the markets, be doing if Washington stopped distracting us with politically manufactured crises?

What if we reached a grand bargain that closed tax loopholes and made long-term cuts in entitlement spending? What if, instead of making arbitrary cuts, we took a hard look at military spending and decided what we could do without?

Businesses would feel more confident about hiring and making long-term investments. Stock prices would probably rise.

Too bad we never talk about that long-term potential when we’re preoccupied with the crisis of the moment.