Highlights -
With no debt ceiling, default or downgrade threat, the market impact of this week's public unveiling of the super committee's recommendations is likely to be muted relative to the debt ceiling debacle of late July and early August. -
Congress' record-low 9% approval rating reflects the low bar of expectations for the super committee. The market expects the default cuts of $1.2 trillion will do the bulk of generating the required savings. -
Even with no agreement from the super committee, an end-of-year deal may still take place that may pair a smaller deficit reduction package of a few hundred billion dollars with the extension of the expiring payroll tax cut and federal unemployment benefits. Super Committee: Go Big or Go Home? With the congressional super committee's deadline on finding $1.5 trillion in deficit reduction this week, the markets want to know if they will go big or just go home for the Thanksgiving recess. The debt ceiling debacle that came to a head in early August 2011 left a lasting impression on the stock market. The S&P 500 index plunged 17% from July 22 to August 9, in part driven by Washington's inept handling of the increase of the country's debt limit and the subsequent downgrade of the U.S. credit rating by Standard and Poor's on August 5. Fortunately, this week's public unveiling of the proposals from the super committee tasked with finding the required $1.5 trillion in deficit reduction over 10 years is unlikely to spark the same violently negative market reaction. There are two key reasons the market reaction is likely to be much more muted: -
First, there is no debt ceiling or potential default looming this time. This is because the budget act put in place in August 2011 triggers automatic cuts-also called sequester-totaling $1.2 trillion over nine years beginning in 2013, in the event the super committee fails to come up with $1.5 trillion in proscribed savings. This pushes the time frame when the United States will again bump up against the debt ceiling to early 2013-after the next election. -
Second, we are unlikely to see a debt downgrade of the United States this time. In recent months it has become clear through public comments that the major rating agencies are unlikely to downgrade the U.S. credit rating on a failure of the super committee to agree on the deficit reduction as long as they do not remove the sequester that invokes the automatic $1.2 trillion in cuts and do not circumvent the size of the cuts through budget accounting gimmicks. The next credit event is likely not until 2013, under a new Congress. Fitch may move the U.S. credit outlook to negative implying a bias to downgrade and both S&P and Moody's have said a downgrade is likely absent a major fiscal consolidation package in 2013. 
With no agreement, $1.2 trillion in deficit savings will result from the automatic discretionary spending cuts through program spending caps known as sequestration. However, it is unlikely that the cuts triggered by the automatic sequester will actually take place come 2013. This is because there is likely to be a major deficit reduction package in 2013 under a new GOP-dominated Congress following the 2012 elections. This plan will significantly alter the pro-rata allocation of cuts across discretionary spending programs that would take place under the automatic sequester. This base case results in an outcome for the markets that is muted - especially relative to this summer's reaction. Congress' 9% approval rating (Chart 1) highlights the low expectations for the super committee to bridge the partisan divide and craft a ground-breaking deal that addresses the nation's debt that crossed the $15 trillion threshold last week. However, the failure to come to an agreement does not mean that Congress goes home with no plan to take any fiscal action this year. An end-of-year deal may still take place that may pair a smaller deficit reduction package of a few hundred billion dollars with the extension of the expiring payroll tax cut and federal unemployment benefits. 
IMPORTANT DISCLOSURES The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Tracking # 1-024746 | Exp. 11/12 | 
