U.S. Debt Ceiling Battle: A Re-Play Of August 2011?

Uncertainty over U.S. fiscal policy will hang over the economy for at least another two months. How will financial markets behave as the debt-ceiling deadline approaches?

U.S. Debt Ceiling Battle: A Re-Play Of August 2011?

T he U.S. equity market cheered last week because a major part of the cliff – middle-class taxes – has been averted. The fiscal drag in 2013 will be about 1.5% of GDP. This is good news in terms of growth, but the bad news is that investors still face a replay of the summer of 2011 when an acrimonious fight over the debt ceiling contributed to a rout in risk assets. The S&P 500 fell by about 16% in the summer of 2011, although there were other factors weighing on risk tolerance besides the debt ceiling (Europe, China and questions regarding the strength of the U.S. economy).

Investors have learned from that episode and may be more reluctant to sell risk assets in fear of missing the rally once a deal is struck. The fact that the stock market correction in the closing weeks of the fiscal cliff debate in 2012 was not particularly severe suggests that investors have become more tolerant of Washington infighting. Nonetheless, this is far from assured.

Stocks and high-yield bonds will deliver solid, if not outstanding, returns over the next 6-12 months. (tweet this!)

Our medium-term bullish view remains in place, in part because China’s economic growth is bottoming and the risk of another European financial crisis has moderated. Stocks and high-yield bonds will deliver solid, if not outstanding, returns over the next 6-12 months. Investors that cannot move in and out of the market quickly should remain overweight equities and high-yield bonds and ride out the near-term market volatility.

Stay tuned.

On A Collision Course With The Debt Supercycle

Reprinted from: The Globe And Mail
By, Larry MacDonald

Which is the best investment approach – dividend stocks, index funds, value plays or growth stories? Alas, this debate is looking like an exercise in rearranging the deck chairs. That’s because financial markets are on a collision course with the Debt Supercycle.

On A Collision Course With The Debt Supercycle

T he Debt Supercycle, a term coined by Montreal-based BCA Research, describes a persistent increase in national debt relative to gross domestic product (GDP). What this means in layperson terms is that many countries are increasingly living beyond their means, raising serious questions about the sustainability of current levels of prosperity….

…We are now in a reflationary period, when the economy is being pumped up by central bankers and other policy-makers. Substantial equity exposure may work during this time, but adhering to target allocations will be more important than ever. Indeed, instead of rebalancing to a fixed asset mix, a progressively more conservative mix might be considered as the reflation matures and moves closer to a possible tipping point.

What will also help is diversification. Equities should include a good weighting in emerging economies given the Debt Supercycle is not as advanced in those countries, advises BCA Research.

As for fixed-income securities, say others, a good percentage in short-term quality bonds is advised.

[...Read the full article at The Globe And Mail Online]