Market braces for federal budget battle

Get ready for a budget battle royale between the White House and Congress -- one that could determine the trajectory of the stock market for the remainder of the year, writes Jeffrey Kleintop, chief market strategist at LPL Financial, in a new note to clients.

President Obama is due next week to submit his 2013 budget, which covers the federal fiscal year starting Oct. 1. The White House missed last year's deadline, and the House and Senate split at the time on passing budget resolutions. Kleintop cautions that this year's gridlock is likely to be no different, but with even more serious implications for stocks.

"The 2013 budget is already going to have the biggest impact of any budget in decades even if no action is taken in Washington," Kleintop says. "The fiscal headwind comprised of both tax increases and spending cuts under current policy totals over $500 billion, or 3.5 percent of GDP."

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The U.S. has never experienced a deficit cut of more than 2 percent of GDP that did not result in a sharp decline in GDP, Kleintop notes. That means addressing all the costs and tax cuts outlined in the table below, which could combine to put a major dent in economic growth. See a breakdown of the $500 billion budget albatross, courtesy of LPL:

(Credit: LPL Financial)

"The 2013 budget changes, primarily consisting of tax increases, are already in the law and would need to be changed to mitigate or restructure them to be less of an economic drag," Kleintop notes. "If not, a return to recession may be looming in 2013."

Furthermore, the risk that the White House and Congress will fail to reach a budget deal should keep markets from moving steadily higher in 2012, Kleintop cautions.

"With Congress now back in session and the president's budget due on Feb. 13, just a week away, the markets may begin to refocus on the risks to the economy posed by inaction in Washington leading to a return of volatility," he says.

[rayward73446]

We need our elected officials to do their job, compromise, and pass the budget for 2012 and other key legislations. I am sick and tired of partisan bickering and the House doing nothing. Congress passed the least legislation last year than any congress ever. Mr. Bohner needs to use his position as House Speaker to get the tea party holdouts back in the fold and actually do thier job instead of the childish posturing they have been doing. Our country needs for the congress to do the work before them and stop the stalemate that they have constructed. When both parties compromise we Americans win. As long as the partisanship continues, we lose. Forget that this is an election year, and get the job done. Republicans hope they will gain the white house this year and are stalling any work until next year. Their plan of stalling everything until then is self centered, and doomed to fail. Their inaction and hair splitting has hurt citizens badly, and we can't wait another year for them to act.
If I had the power I would fire them all. The American people are their bosses, and they are supposed to work for us, instead of pandering to the rich, big banks, and corporations. Obama will beat any of the repubs running for president this year and they should be smart enough to figure that out. Either way their plan of inaction will not work as planned, and they will be bigger failures than they are now with an 11% approval rating. The worst of any congress since the nation was formed. Let's fire the bums and get someone in the offices that will do the work, and get things done.