Despite the market's two-day selloff, the fiscal picture continues to look very supportive this month. The market's reaction to the possibility of the Fed ending quantitative easing (QE) and reversing course on monetary policy, sooner rather than later, is indicative of the type of reaction we will see if and when the Fed actually does do that. I am not even the slightest bit worried that this will actually happen; nonetheless, that's the reaction we can expect. And, as I said in my post on Thursday, it's a reaction you should fade. In other words, buy into weakness.
Getting back to the fiscal picture, so far in the month of February, we have seen $326 billion in net withdrawals (net withdrawals equal total withdrawals minus public debt redemptions) according to the most recent data from the Daily Treasury Statement. Given that there is still time left in the month, that's a very large number. In contrast, all of January saw $325 billion in net withdrawals and December produced $296 billion in net withdrawals.
As for the deficit, it's running at around $173 billion so far in February. This is also a very large number and nearly twice the average of about $90 billion that we have seen over the past year. All of this should be very supportive.
In addition, personal income tax rebates so far in February are at $66 billion, which offsets a good chunk of the rise in the payroll tax that went into effect at the beginning of the year. That increase is expected to remove about $100 billion in personal income this year, so in February alone, two-thirds of that drain has been restored thanks to those income-tax refunds.
The bottom line is that the system is being supplied with a large amount of "net financial balances" due to a very positive fiscal picture. This could provide a strong cushion against sequester-related cuts -- should those go into effect -- beginning on March 1.
With the market concerned about the double fear of an early end to QE and the sequester, it is not unusual to see the normal misinformed selling. But it looks like this is a good buying opportunity, and given this month's strong fiscal picture, I don't see any real problems for stocks until the usual, "sell in May and go away," bearish seasonal cycle hits three months from now. That, of course, is totally driven by April tax payments, which result in a drain of those private sector financial balances.
The picture clouds after that because austerity, once under way, could feed on itself as economic activity. Federal tax revenues will fall, creating the need for more austerity to keep the deficit within bounds. We saw how this played out in Europe, with deficits staying static, but unemployment surging and recessions rolling from one period to the next. When that happens, as far as the market is concerned, it will be every man for himself.
