Shock Therapy | Method to the Madness

Is there a real method to the madness in Washington?

I had the opportunity to spend the last two days in Washington, DC, as a representative of the Miami Jewish Community to meet with a number of lawmakers from both parties…US Senators, Congressmen, their chief staffers, and White House staff. The fiscal issues we face dominated the discussions as the next rounds of deadlines are fast approaching. The year-end deadline resulted in final resolution of the Bush tax cuts, and in the last week both the House and the Senate have passed legislation to extend the debt limit into August. So some meaningful progress has been achieved, but much harder negotiations are facing lawmakers this month.  What looms is the $1 trillion cut in discretionary spending, including defense, which is known as, “The Sequester.” This will take effect on March 1 if Congress does not act.1 Then there is also the March 27 expiration of the current “CR” or continuing resolution which authorizes all general spending by the federal government.2


US Capital and US Senate

The Sequester is scary, and a great sense of anxiety was felt in all the discussions I participated in. An indiscriminate whacking of the federal budget may feel just given the frustration many rightly feel with the way our legislative and executive branches have failed to effectively cooperate in recent years. But, then consider the impact on our citizens and the military. The charities who participated on our trip are terribly concerned about whose early childhood programs may get terminated or which elderly citizens no longer qualify for home-delivered meals. There were also discussions of international issues in our sessions. With all kinds of threats brewing in the world that could impact both national and homeland security, how wise is it halt production of new military programs?

Sadly, it seems our legislators can only figure out a way forward under the threat that their inaction would cause calamitous results. It creates such unnecessary anxiety across society. Will they act or won’t they? How many more times does the public deserve to be taken out to the edge of the abyss, only to be saved at the very last moment? While revolting to endure, this approach seems to actually be somewhat effective. Shock therapy appears to be the appropriate treatment for our dysfunctional government.

The markets are accepting this crazy reality, with the S&P 500 rising over 5% for the month of January– its best start to a year since 1997.3 Underlying private sector economic activity continues to make slow but decent progress, and corporate earnings season is coming in better than expected. Through January 30, 223 companies in the S&P 500 had reported earnings, and 66.4% of them beat expectations.4 Overall, earnings have improved in the fourth quarter by 2.5% as compared to a 2.2% decline in the third quarter of 2012.5

The concern is that the markets have become too complacent with this approach of going down to the 11th hour and 59th minute before finding agreement. What if this time around we go over the proverbial cliff? At least equity valuations are generally not on the high side historically speaking, so there is some cushion built in if the shock therapy fails in the weeks ahead. But if the treatment continues to work, we very well might be somewhat further down the path towards greater fiscal health, which could unleash great forces of confidence to invest and spend by consumers and businesses alike. With the combination of more certainty in the tax rates, appropriate restraint in government spending and reasonable private sector economic growth, the likelihood of continued shrinkage in the deficit could significantly increase. Hang on for more down-to-the-wire antics in Washington. The markets for now at least are signaling potentially positive resolutions. Let’s hope the markets have it right.


Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
OneBite Editorial Staff

OneBite® is a Top 50 Financial Advisor Blog powered by Wipfli Financial Advisors. Founded in 2011, the digital magazine is dedicated to providing intelligent, in-depth coverage and analysis of the top financial and economic issues facing investors today.

No Comments Yet

Comments are closed

Shock Therapy | Method to the Madness

time to read: 3 min