In my recent reading list post, I touched on a zerohedge.com article titled “Art Cashin warns Bernanke fans ‘Be careful what you wish for on the deficit.’” The piece detailed the deficit and questioned if the Treasury would offer fewer bonds, especially in light of higher taxes in 2013 and spending cuts as a result of sequestration.
At Fort Pitt, we feel this is not a concern, given that Congress is much more likely to increase spending once it appears the deficit is under control. In fact, we are already seeing some state governments (California as one example) ramp up their spending in response to better-than-expected budget news. As the propensity to spend in Congress is always so great, we do not expect to see a shortage of Treasury debt.
What to watch for in your portfolio
Any marked improvement in the deficit could provide a bullish backdrop for stocks. According to the Congressional Budget Office (CBO), the Federal deficit for the first seven months of fiscal 2013 is nearly one-third smaller than the shortfall recorded during the same period last year. This is because revenue collections are 16 percent ahead of 2012, and overall federal spending is 1.9 percent lower than last year. Given that US companies have been lamenting budget uncertainty as an excuse for hoarding cash, this positive trend in the deficit could spur an incentive for higher levels of corporate capital spending.
Over the long-term, as the deficit continues to improve, and as companies hopefully begin to spend, we think we’ll get the opportunity to play more “offense” in portfolios, rather than the defensive posture we have held for the past few years, by owning businesses with greater exposure to the economic cycle. We’re focusing on companies with profits tied more closely to faster economic growth, such as chemical companies, industrial goods-makers and energy names.