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The Government shutdown and debt ceiling battle continue to dominate the markets. It is normal for markets to decline with this kind of news out there as individual investors tend to panic and sell. Who can blame them when all they hear on the news is people describing how awful not extending the debt ceiling would be and all the scenarios where that would actually happen. When they sell shares of their mutual funds then the mutual fund has to sell stocks to raise cash and the market declines. Other investors see the market decline and then they sell, and so on and so forth.
I understand that anything can happen here and being tactical we are prepared for any eventuality. However, I find it highly unlikely that the US will default on its debt. Either there will be a last minute kick the can down the road agreement that allows everyone to save face, one side will cave, or Obama will use some sort of presidential decree to raise the debt ceiling. Either way it is highly likely that this current selloff ends up being a great buying opportunity.
The New Normal?
At the Morningstar Conference last week I heard a presentation from State Street Global Advisors (the SPDR guys) about the possibility that the current political situation we have is the “new normal”. It is obvious that this President, House, and Senate can’t agree on anything. That is usually not a bad thing as I tend to agree with Mark Twain when he said
“No man’s life, liberty, or property are safe while the legislature is in session.”
But when it comes to bigger issues like a government shutdown or the debt ceiling and it starts to impact the markets then it gets out of hand. Since we have elections often I have always kind of assumed that at some point the guys on both sides who don’t agree will be replaced by new guys who might better compromise. State Street’s premise was that the country might be so divided politically that the government as it is currently constituted actually reflects the temperament of the country so when one set of guys who doesn’t agree gets voted out they will just be replaced by new guys who don’t agree. Being tactical this doesn’t really impact what we do, in fact it probably creates some more opportunities in the volatility, but it was an interesting idea that the Democrats and Republicans could be waging battles like this out into the foreseeable future. If that is indeed the case then investors need to prepare for all the noise that comes out of these arguments.
Positioning and Recent Moves
Income Strategies: As expected the Fed’s decision not to taper bond buying has created some opportunities in the bond market. This month we have bought GNMAs, TIPs, International Treasuries, and Floating Rate Bonds. We also got back into Dividend Paying Stocks. Depending on what the Fed decides to do we may not be holding these bond positions for long.
Trend Aggregation Strategies: We are currently fully invested in our equity momentum models in accordance with the market trend. We have used recent weakness to be fully invested in our counter trend models.
Momentum Strategies: We took a little bit of risk off the table in our momentum strategies and they are now close to their full equity allocations.