Christmas has arrived early in the U.S. as the Senate played the role of Santa to pass the budget deal to President Obama for his final approval. The deal showcased a rare display of Senate bipartisanship to clear the clouds of political dysfunction that threatened to negate the improvements in the overall economy and a dream run for equity indices.
The smooth passage of the deal by a margin of 332 to 94 in the House of Representatives and 67 to 33 by the Senate also underplays a remarkable achievement to end the political impasse as observed by a partial government shutdown in October, a near-default by the U.S. Treasury and congressional gridlock on several issues.
It is too early to speculate whether this will lead to a new era of smooth governance for the largest economy of the world and address the contentious issue of debt ceiling when it reaches its limit in February. However, what it definitely has achieved is a two-year cushion to avoid the brutal cycles of fiscal crisis and has given a fresh lease of life to avert another federal shutdown until Oct 1, 2015.
The budget deal has set a limit for discretionary spending at $1.012 trillion for 2014 (up from $967 billion) and $1.014 trillion for 2015 (up from $995 billion), and has spared the congress to seek a customary vote on these issues. It has also rolled back $63 billion in automatic cuts, popularly known as sequestration, that were to hit the Pentagon and some domestic departments on the first day of the new year.
Without raising taxes, the accord intends to reduce the fiscal deficit by $23 billion over a 10-year period. It also aims to offset the increased discretionary spending through $13.6 billion from new user fees on air travel and food aid shipments, $12 billion from reduction in pension benefits for uninjured military personnel and $28 billion from extension in Medicare cuts. In addition, the deal requires new federal employees to take more burden of their pension expenses by contributing more toward their retirement funds than current government workers.
With the president virtually set to give his final approval for the budget deal to be enacted as a law, the nation could expect a two-year reprieve from an across-the-board sequester cut that had hit every government program ranging from medical research to military weapons development. The deal also eases smooth government functioning and eliminates the risk of last-minute approval through voting to endorse federal spending programs.
This in turn reduces the risk of high furloughs and economic loss as exhibited during a 16-day partial shutdown in October, which resulted from an impasse between Obama and the Republicans, who demanded changes to his 2010 healthcare law as a condition for approving funding for government operations. Estimates from credit rating agency Standard & Poor’s reveal that the partial shutdown of federal services across the country had robbed the exchequer of $24 billion, and a possible recurrence in Jan 2014 would have further made a hole in the economy.
The smooth passage of the budget deal has also been lauded by Standard & Poor’s, although it was unlikely to modify the U.S. sovereign credit rating due to its small size and minor impact on the long-term fiscal outlook.
The budget deal has come as welcome news for investors, who were worried with the volatility of the U.S. dollar in the last 90 days that fell to 4.93% on Dec. 13 from a yearly high of 7.34% in September, according to the Bloomberg U.S. Dollar Index. They envision the deal as a first decisive step to address the key issues in the economy and fix a broken process that has led the government to be funded primarily through stopgap spending bills since 2011.
3 Top Stock Picks
Amid such an encouraging development, there are certain stocks with attractive valuation metrics backed by a Zacks Rank #1 (Strong Buy). Let’s take a closer look at these companies that appear to be well positioned to benefit from the solid sector dynamics and positive geopolitical environment.
Packaging Corporation of America (PKG - Snapshot Report): Headquartered in Lake Forest, Illinois, the company manufactures and sells containerboard and corrugated packaging products. This fourth largest containerboard producer in the U.S. manufactures a range of linerboard and corrugating medium and other products such as multicolor boxes, and displays used to merchandise products in retail locations, and special design/application boxes used in the food and agriculture industry. The stock is trading at a forward P/E of 20.03x and has a long-term earnings growth expectation of 15.2%.
Towers Watson & Co. : Based in New York, Towers Watson offers human capital and financial consulting services. The company helps organizations improve performance through effective people, risk and financial management by providing customized solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. The stock is currently trading at a forward P/E of 21.63x with a long-term earnings growth expectation of 11.0%.
Micron Technology Inc. (MU - Analyst Report): Headquartered in Boise, Idaho, Micron manufactures and markets semiconductor solutions across the globe. The company sells its products to original equipment manufacturers (OEMs) and retailers through its internal sales force, independent sales representatives, and distributors, as well as through a Web-based customer direct sales channel, and channel and distribution partners. The stock is currently trading at a forward P/E of 10.49x and has a long-term earnings growth expectation of 11.8%.
Such strong fundamentals signify that this is perhaps the most opportune time to own these high-potential stocks that pledge a healthy ROI.