One of the factors that has been leading some to predict that the Joint Select Committee on Deficit Reduction (aka, the super committee) will come up with a deficit reduction plan of its own is the belief that Wall Street will be disappointed if that doesn’t happen and that the major averages will suffer immediately and significantly.

But while there is some reason to think this could happen (after all, Bank of America Merrill Lynch predicted it several week’s ago), the counter argument that Wall Street isn’t really expecting much, won’t be all that surprised if/when the committee fails, and that the the prediction of a massive negative market reaction is grossly overstated seems to be getting much stronger as the November 23 deadline gets every closer.

In a research note released 10 days ago by Steven Hess and Bart Ossterveld at Moody’s Investors Service (sorry, subscription needed so providing a direct link to the comment isn’t possible) is one of the major reasons this “it-won’t-be-a-big-deal-at-all-if-the-super-committee-fails” attitude is increasing taking hold.  According to the comment, investors won’t care if the committee doesn’t agree in a deficit reduction plan or if its plan isn’t agreed to by Congress because of the $1.2 trillion in additional spending cuts that failure would trigger.  In other words, the Street is assuming that a $1.2 trillion deficit reduction effort will occur one way or another and doesn’t much care whether it’s because the a plan has been enacted or triggered.

That’s not to say that Moody’s doesn’t prefer that the super committee process succeeds.  Because a super committee-approved plan is more likely to entitlement and revenue changes and those changes would be more likely to be stay in place than the appropriations reductions that would be assumed if the across-the-board cuts, Moody’s says “Reliance on (the sequester) would clearly be a more negative outcome than it the committee were to produce an agreement hat was subsequently adopted by the Congress.”  Moody’s also said that a super committee failure makes it less likely that the Bush-Obama tax cuts will be extended beyond the current expiration date of December 31, 2012.

Beyond expressing a mild preference for a super committee deal but an indication that a sequester would not be that surprising or distasteful and, therefore, that either outcome would be acceptable, the Moody’s report indicates or implies that Wall Street would react more forcefully if any of the following happened:

  1. The super committee reported and Congress approved a deficit reduction plan that was significantly larger that the $1.2 trillion the deficit would be reduced if a sequester was triggered.
  2. The super committee failed and the sequester was eliminated, reduced in size, or delayed.
  3. The super committee reported a plan that relied on appropriations reductions and/or gimmicks to reduce the deficit.

[Cross-posted at Capital Gains & Games]