Adam Shell, USA TODAY
NEW YORK -- Sure, President Obama will talk about gun control and immigration reform when he addresses the nation tonight in his State of the Union Address.
But what Wall Street will really be watching for is to see "how focused the Obama administration and Congress are in trying to avoid the March 1 sequester," when $1.2 trillion in automatic cuts to defense and domestic discretionary spending start to kick in, David Kelly, chief global strategist at JPMorgan Funds, told clients in a research note Monday.
The sequestration, which calls for across-the-board federal budget reductions, comes at a time when "fiscal drag" is emerging as a key talking point on Wall Street. Obama's speech comes just three weeks before it takes effect and as economists are still trying to gauge the impact the Dec. 31 expiration of the 2% payroll tax holiday has had on consumer spending.
"Fiscal drag," Kelly says, "should be the topic of the week as American investors get their first look at the impact of this year's tax increases on consumer spending and retail sales," adding that Obama's State of the Union Address "lays out the battle lines for the debate on the sequester."
The sequester has market-moving implications. A poll of money managers at hedge funds and pension funds by Potomac Research Group found that 53% don't see a deal getting done in time to avoid the action. If an accord isn't reached, 51% said they expect the Dow Jones industrial average to drop 5% or more.