The U.S. budget debate is holding stocks hostage, as chief executive officers prepare to cut capital spending for the first time since 2009 should President Barack Obama and Congress fail to reach an accord.
Expenditures by Standard & Poor’s 500 Index companies will fall 1.3 percent in 2013 after three years of growth, according to more than 10,000 analyst estimates compiled by Bloomberg. Companies from Verizon Communications Inc. to Rockwell Collins Inc. said they don’t plan to boost investment amid concern political leaders will fail to agree on a plan that would avert more than $600 billion of spending cuts and tax increases that threaten to throw the U.S. into another recession.
Bears say CEO pessimism will sap the rally that boosted the S&P 500 12 percent this year and note that the last time capital spending declined was at the end of 2008, just before stocks slumped to a 12-year low. Bulls point out that estimates for corporate spending show any decline will be limited and say the improving U.S. economy will lift equity valuations, now 12 percent below the 58-year average, Bloomberg data show.
“In an environment where the economic and political outlook is highly uncertain, it is hard for executives to make investment decisions,” Abi Oladimeji, who helps oversee $4.3 billion as head of investment strategy at Thomas Miller Investment Ltd. in London, said in a telephone interview on Dec. 12. “The danger is that we see policy errors, which could undermine equity markets and the broader economy.”
Whatever the outcome, investors say the negotiations in Washington are the primary catalyst for investment decisions as 2012 draws to a close. While the S&P 500 has risen 109 percent from its lows in March 2009, it is poised for the first fourth-quarter decline since 2008. U.S. stocks had the worst performance among 24 developed equity markets this quarter.
The S&P 500 slid 0.3 percent to 1,413.58 last week and snapped a six-day gain after House Speaker John Boehner, a Republican from Ohio, said again that Obama’s budget proposal is “anything but” balanced. Obama said the negotiations are “a work in progress.” It added 0.6 percent to 1,422.67 at 10:09 a.m. in New York today.
A Bloomberg National Poll showed a majority of Americans back Obama’s demand that tax-rate increases for the highest earners be a precondition for a deal that cuts U.S. entitlement programs. The Congressional Budget Office has warned that if talks fail, the economy may slip into a recession in 2013.