Market woes have one cause: sequestration

It’s not unusual for an investment bank to downgrade a stock or two. Individual companies can have issues, but it’s a rarity that you see an entire sector get written off.

That’s what Wells Fargo’s Ed Caso did last week.

He downgraded Booz Allen Hamilton, CACI International, ICF International, ManTech International, NCI Inc. and Science Applications International Corp. Those are all the government services providers that he follows.

He has plenty of reasons for his assessment:

• Sequestration and across the board cuts will happen on Jan. 2.
• The administration will protect federal workers and the military so a disproportionate amount of cuts will hit contractors.
• Sequestration aside federal spending will slow and perhaps declined in some areas.
• Pricing pressures from low-price, technically acceptable contracting.
• Intense competition
• Contractor backlogs will take a hit if awards are de-obligated as budgets get cut.

Nearly all of reasons revolve around sequestration and the fallout of automatic cuts.

It’s a pretty bleak view of the world.

Bill Loomis of Stifel Nicolaus cites many of the same concerns, but he isn’t quite as pessimistic; however, he expects many of the stocks he follows to underperform.

It is hard to imagine that sequestration will actually happen, and investors should already be calculating budget cuts into what they are willing to pay for stocks. At least I would.

In fact, I think we might see a boost in investment activity once sequestration is settled, and the fiscal 2013 budget is passed. And who knows, maybe we’ll get lucky, and there will be an early road map to getting 2014 passed in a timely matter. I’m not holding my breath.

But the fact of the matter is that it is the uncertainty that kills investment activities, both on Wall Street and in corporate board rooms, big and small.

Agencies delay contracts, companies put off acquisitions and other expenditures, and individual investors grow wary.

It’s a vicious cycle that can easily be put to rest by solving the sequestration puzzle.