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Damn the Sequester—Stocks Are Full Speed Ahead

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Whether the "sequestration" happens or not, money is flowing into the stock market and likely will continue to do so this year, say analysts who spoke recently to CNBC.

Robert Luna of SureVest Capital Management says the quick flow of money into stocks may already be cause for concern — even without the automatic spending cuts sets to kick in March 1 — but other good options are scarce.

"January was an outstanding month for the S&P 500, so even without the sequestration the market's a bit vulnerable here," he said. "But we have to place people's money where it can get a return. Sitting on cash is not going to do it. Government bonds — you're already seeing people lose money there this year. The money has to flow back into equities."

The more cautious view is held by Michael Farr, president of investment management firm Farr, Miller and Washington, who sees a sequester-triggered $1 trillion in cuts over the coming decade causing the market to pull back as much as 10 percent, and quickly.

Still, he says: "I think you'll see investors come in and buy the dips, and perhaps longer-term they should. Look at P-E ratios and other metrics. Stocks are not wildly overvalued."

Luna, too, sees the makings of a possible correction, but perhaps on the order of 5 percent.

However, "If you see a sell-off based off the sequestration, you need to start loading up on stocks at that point."

But is the sequester really going to happen? Arthur Hogan, Managing Director & Head of Product Strategy Equity Research at Lazard Capital Markets, says it looks like it.

"Both sides of the aisle don't seem to be afraid of the sequester. The Democrats look at it as their only opportunity to make any defense cuts, which the Republicans don't want. The Republicans see it as — making any cuts whatsoever is a step in the right direction. ... So we may not do anything and let the automatic (cuts) kick in."

He says as investors grow weary of the process, as they did ahead of the "fiscal cliff" last year, they could sit on their investments or even start pulling them out.

"The 6 percent move that we've seen so far in '13 may get cut in half as we watch the drama play out in Washington," he said.

On the other hand, a pullback is exactly the excuse many are looking for to enter a market that they perceive has advanced too far, too fast — 8 and 10 percent since December lows in the S&P 500 and Nasdaq, respectively.

"I think the crowded trade is the fixed-income market. ... We've seen investors pour money into the bond market since 2007 without stopping, and we've seen money come out of equities without stopping until this January — it's the first month we saw more money come into stock funds that into bond funds. I think that rotation happens in 13, it's begun a little bit, but I think it's going to be a lot larger."

Tim Speiss, chairman of personal wealth at EisnerAmper, see the big risk of sequestration in potential employment losses — some estimates say 1 million jobs may be on the line.

"Government job losses due to sequestration will likely have ripple effects throughout the economy. ... That's a big concern." And an estimated 4 percent hit to GDP, he says, "is enough to throw us into a recession."

Surevest's Luna says slow growth in the U.S. — made possibly even slower by sequestration — simply means that investors should be broadening their investment horizons.

"Investors should now be looking at emerging markets and international markets for the next leg up. ... A stock like Disney that reported a great earnings; if you see a pullback from the sequestration, you can play into that. They're expanding in a couple of years into Shanghai, expecting 7 million visitors in that theme park."

But the bigger play, he says, is emerging markets and frontier markets. "Places like Vietnam. ... Those markets are trading 9 times forward earnings vs.15 on the S&P, and GDP looks like 6.5 to 7 percent versus 2 (in the U.S.), which could quickly be cut in half if the sequestration goes through."

Follow @Matt_Twomey on Twitter.

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