By Peter Schroeder - 03/06/13 12:59 AM EST
The stock market burst through predictions of sequester doom Tuesday as the Dow Jones industrial average closed at a record high of 14,253.77.
The Dow reached its highest level since 2007 and sent the clear signal to Washington that investors are unconcerned about the $85 billion in automatic spending cuts triggered on March 1.
The lack of anything resembling a panic on Wall Street could complicate efforts by Democrats and the White House to blame Republicans for effects of the sequester.
In the weeks leading up to the cuts, the White House launched an aggressive campaign that warned of severe consequences for the economy and military if the sequester went forward.
Republicans too opposed sequester’s indiscriminate cuts, but they argued at the same time it would be better to have them than to replace spending cuts with new taxes, something demanded by Obama.
On Friday, when the sequester was triggered, Obama shifted gears slightly, saying it would not be the “apocalypse.” Republicans have accused the administration of over-hyping the sequester’s effects.
Many people may not feel the cuts immediately. For example, furloughs for government workers will begin in April.
Democrats believe pressure will build on Republicans as more and more people are inconvenienced by the cuts through long lines at airports or “closed” signs at national parks. The administration on Tuesday said it would cancel tours of the White House because of the sequester.
But on Wall Street, there appears to be little fear that the cuts will significantly slow the economy.
Instead, there is optimism that the Federal Reserve’s unprecedented steps to ease monetary policy, a practice that has been duplicated by other central banks, will continue a market rally.
Under Chairman Ben Bernanke, the Fed has put interest rates near zero and is pumping trillions of dollars into the economy with the goal of lowering national unemployment to 6.5 percent. With unemployment now standing at 7.9 percent, that means markets see no reason to think the Fed’s policies will be changed anytime soon.
“It’s all monetarily induced, semi-artificial market reaction,” said Daniel Alpert, managing director of Westwood Capital, who like other analysts had doubts about the underlying strength of the U.S. economy. “It’s not enough to pop champagne corks by any means.”
“If the Fed stopped buying assets tomorrow, much less raised interest rates … I think you would quickly see this rally turn around,” Michael Feroli, chief economist for JPMorgan, said.
Wall Street analysts said the sequester is being seen as an inconvenience that will slow growth but not seriously knock the economy off its stride.
“It’s probably not enough that it’s really going to knock the economy off-keel,” said Feroli. “I haven’t really had people push back against the idea that the sequester will subtract from growth, but rather I think the general sentiment is we’re talking about, I wouldn’t say minor, but not disastrous kind of subtraction from growth.”
Wall Street’s reaction is important because policymakers have frequently taken cues on economic issues from the markets.
Congress quickly approved a bailout of the nation’s banks in 2008 after markets plunged when the House initially rejected a bill. In 2011, a government shutdown was averted as traders watched Washington intently, and later that year the White House and Congress reached a deal to raise the debt ceiling under some pressure from markets. That deal created the sequester.
Merk said Tuesday that traders are viewing the latest battle in Washington differently and do not see the sequester as the same kind of threat.
“The economy as a whole is not affected by $80 billion in cuts that are being phased in,” he said. “People have lost interest in watching these things.”
Ed Friedman, director of Moody’s Analytics, said that the Dow’s record high does suggest market confidence that the economy can absorb the blow of the sequester.
He also said the cuts could boost markets by showing that Washington is doing something to address the country’s finances.
“I want to be sensitive to all those people who are going to lose jobs and get furloughed … but in terms of the overall macroeconomy, we’re finally at a point where that does not create another recession,” he said.
Several analysts warned politicians should not interpret a surging Dow as proof the economy is rolling. The Commerce Department’s most recent estimate of GDP growth found it grew a slight 0.1 percent in the fourth quarter of 2012.
And Alpert pointed out those basking in the Dow’s new high should remember that a new record basically means that the nation has just now recouped all the losses it suffered during the financial crisis.
“It’s great to light the cigars when the market comes back from zero, but a lot of people have earned nothing for five years,” he said. “If you were an investor in the markets hoping to make money back at the end of the bubble, you haven’t made any money. In fact, you lost a lot of money for a long time.”
The White House and congressional Republicans signaled they’ll try to use the Dow’s record to bolster their economic cases going forward.
White House press secretary Jay Carney said the economy was poised to excel as long as “Washington did not unnecessarily hinder the process.” He said growth would be stronger if Republicans had replaced the sequester.
“The growth that we do see and the job creation we do see would have been better, would have been greater if it were not for this adamant refusal to approach this problem in a balanced, sensible, common-sense way,” he added.
Senate GOP Whip John Cornyn (Texas), for his part, jabbed at the White House’s doom and gloom over the sequester after the Dow spiked.
“Guess the sequester hype was just that: Dow trades at an all-time high,” he tweeted.
Justin Sink contributed to this report.