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Hopes Rise in U.S. for Sequestration Deal

Obama Win Sparks New Tone, Outlook On DoD Budget

Nov. 10, 2012 - 01:39PM   |  
By JOHN T. BENNETT and ZACHARY FRYER-BIGGS   |   Comments
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The adage that elections have consequences is playing out in Washington. Senior Republicans suddenly are in a deal-making mood and a newly re-elected president is reaching out to a legislative branch with which he has repeatedly clashed.

Though it might prove temporary, the mood in the nation’s capital was noticeably different just hours after President Barack Obama won by a larger-than-anticipated electoral margin and Democrats shocked the pundits by gaining seats in the House and Senate.

Gone was Obama’s often tough talk about congressional Republicans, who vigorously fought his every first-term initiative. Gone, too, for a few days at least, were chesty proclamations by senior Republicans about ensuring Obama’s failure. And Washington insiders shed talk of Obama’s lack of political capital, replacing it with a declaration that his triple-digit Electoral College win earned him a mandate.

All of the above from lawmakers, pundits and analysts injected a new ingredient into the prospects of Congress and the White House agreeing to a massive deficit-reduction package that would avoid $500 billion in Pentagon cuts: Hope.

“In the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together,” Obama said early Nov. 8 in his victory speech. “Reducing our deficit. Reforming our tax code. … We’ve got more work to do.”

The following day, House Speaker John Boehner, R-Ohio, shed his typically tough talk, striking a tone so conciliatory it shook official Washington.

“Mr. President, this is your moment,” Boehner said. “We are ready to be led.” Boehner said he hopes Obama succeeds, a departure from the GOP line four years ago in which many said their No. 1 priority was to deny Obama a second term. Boehner also for the first time opened the door to House Republicans accepting some new federal revenues to pay down some debt, which Democrats say is needed to avoid the full $500 billion in pending defense cuts.

The new tone and outlook were evident as former lawmakers and longtime analysts spoke about what the election’s surprising results meant.

“I think this president can get a big [debt] deal,” said former GOP Rep. Vin Weber of Minnesota. “But he has to act quickly. ... I think [Obama] can claim a mandate.”

Obama’s big win is backed by Democrats’ gains on Capitol Hill. Few experts had that party gaining seats in both chambers, even though Democrats remain the minority party in the House. Those two factors mean Democrats will have a short window in which to push through a big debt deal in the first six months of 2013, lawmakers and experts say.

Thomas Mann of the Brookings Institution said Obama and Senate Democratic leaders must find “10 or 12 Republicans” in the upper chamber who will vote for a Democratic-crafted debt deal.

“Then the president has a good chance to put some pressure on,” Mann said, adding that “he will have much of the business community with him.”

Senate Budget Committee member Mark Warner, D-Va., said legislation that would pare the federal debt and stave off massive defense cuts would get 70 votes in the Senate.

Warner told a forum in Washington on Nov. 8 that a massive deal with spending cuts, new revenues and entitlement-program reforms could garner ample votes from both political parties to pass the Senate.

But the former Virginia governor — and potential 2016 presidential candidate, some say — warned against Senate Democratic leaders pushing through legislation that would pass with “56 Democrats and six Republicans.”

What’s preferable to Warner and members of both parties who have been working in near-secret to begin building a comprehensive debt deal is a bill that passes with a nearly equal number of Republicans and Democrats, he said.

“This will have to be something where people on both sides are mad about it,” he said.

Former House Majority Leader Dick Gephardt, D-Mo., agreed, saying last week: “If you’re going to get a big deal, everyone has to be completely angry and hate the deal — but you can get the votes.”

But all of that almost surely will take place in the early months of next year, when the new Congress takes office.

In the meantime, there is ample consensus among senior lawmakers that, for both to avoid the ire of voters and Wall Street, they must pass something during the coming six-week lame duck session that delays the twin $500 billion defense and domestic cuts.

Senior congressional Democrats and Republicans are talking openly about postponing the date that would trigger those cuts to planned spending.

Warner said lawmakers hope to “make a down payment” during a coming session-ending lame duck period “to avoid sequestration.” And Boehner last week said a delay in the form of a legislative “bridge” is needed because a comprehensive deal with spending cuts, entitlement reforms and tax-code changes “will take some time.”

Market Correction

In the immediate wake of the election, defense stocks were hit especially hard.

The SPADE Defense Index saw a drop of 2.9 percent, while the S&P 500 was off 2.4 percent on Nov. 7. Although mid-size defense contractors followed the general trends of the broader market, top defense companies were especially hard hit. Lockheed Martin’s stock fell 4 percent in the single day of trading, L-3 Communications stock declined by the same percentage and Northrop Grumman’s stock dropped 4.6 percent.

They remained relatively flat for the remainder of last week.

News reports largely blamed market woes on the pending automatic DoD budget cuts and the scheduled expiration of several tax breaks, but the defense market was especially hard hit as a result of increased optimism surrounding the Romney campaign in the month before the election, said Byron Callan, a defense market analyst with Capital Alpha Partners.

“Defense stocks really started to outperform right from Oct. 3, which was the first debate,” Callan said. “I can understand people taking the position that just in case Romney does win, this would be a good position to be in after the election.”

Romney made a series of policy promises suggesting significant increases in defense spending, such as increasing the number of U.S. Navy ships and Air Force jets.

Stocks had climbed significantly since Oct. 3, with the SPADE index up 3.6 percent before Nov. 7. Because of the increases in the month leading up to the election, analysts said the single-day drop on Nov. 7 could be viewed as more of a market correction than significant shift.

Now that the election has passed, analysts said the market likely will be unstable, with sharp rises and falls following perceptions about a congressional deal.

“We’re definitely settling into a fog bank here, and it’s not remotely certain that the stocks can avoid some more turbulence,” Callan said. “It’s not if sequestration hits or not, it’s whether or not the market thinks that there’s a high enough risk that sequestration hits.”

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