The Sequester is Coming!

Stocks took a hard fall Monday, with many market reports focusing on the outcome of the Italian elections.

But even considering Italy, it shouldn’t be overlooked that on Friday — barring some last minute deal which very few people expect — the federal government will institute some across-the-board swingeing cuts to its budget that, to say the least, will not be helpful to the economy.

Cue articles asking why nobody seems to care that the sequester is likely heading our way. AsWSJ MarketBeat explains, it could be that people are just tired/bored by all this budget nonsense aren’t paying attention as much they should:

Some investors said the budget debate seems to produce less anxiety after�simmering for almost two years in and out of the public spotlight. �Apathy is indeed high,� said Terry Sandven, chief equities strategist at U.S. Bank Wealth Management. �The public in general is experiencing a degree of policy fatigue, though that doesn�t take away the importance of the sequester cuts.�

But is that really acceptable? Here’s the Washington Post explaining what could happen in just its own metro area:

The Washington area would be hit hard. Virginia, Maryland and the District cumulatively would lose $29�million in elementary and high school funding, putting at risk 390 teacher and teacher-aide jobs and affecting 27,000 students. About 2,000 poor children would lose access to early education. In the area of public health, less funding would mean 31,400 fewer HIV tests.

And nearly 150,000 civilian Defense Department personnel in the area would be partially furloughed through Sept.�30 � with a total average reduction in pay of $7,500. (Defense Department officials previously explained that the furloughs would probably come in the form of workers being asked to take one day off per week, amounting to a 20�percent cut in pay.)

They also provide a handy state-by-state, category-by-category illustration of where the cuts will land.

It’s not quite a clear-cut as that, of course. Mike Santoli argues that there’s a number of reasons why the sequester may not be too damaging for stocks, from the smallish initial economic impact, to the strength of private sector profits.

But perhaps more telling is a point Santoli makes that’s also been made to me by some money managers: The big danger won’t be on March 1, but in the weeks and months that follow it if becomes clear that Democrats and Republicans can’t reach a compromise and the cuts are here to stay:

Investors can shrug off the slight sting of the sequester cuts alone, for a while. But stronger hints that the broader mix of restraints on spending is undermining an economic and corporate-earnings acceleration in the second half of 2013 would not likely be taken well by the market.

(Addendum: When I started writing this post, I began by noting that investors didn’t seem too concerned with the sequester, but in the late afternoon, that seemed to change — it seems the sequester is now claiming attention.)