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By Jason Stipp and Jeremy Glaser | 10-14-2013 04:00 PM

Separate Signal From Noise in the Debt Ceiling Debate

Investors should focus on a suitable overall allocation but otherwise resist making short-term trades around this highly uncertain and potentially volatile D.C. drama, says Morningstar markets editor Jeremy Glaser.

Jason Stipp: I'm Jason Stipp for Morningstar. As the government shutdown debate and debt-ceiling debate continue in Washington and we approach worrisome deadlines, joining us is Morningstar markets editor Jeremy Glaser to offer investors insights about how they should view the debate in Washington and also some tips for their portfolio plan.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

Stipp: What's the latest on the negotiation as of Monday?

Glaser: Well, on Monday afternoon it seemed like the Senate is fairly close to reaching a deal with the minority leader, Mitch McConnell, and with Harry Reid, the majority leader, and coming up with a package that would give us an extension to the debt ceiling, possibly through January. It would reopen the government and kind of set the stage for some broader fiscal negotiations to try to come up with a long-term solution.

Stipp: What are some of the things that must be in the plan in order for it to actually pass in the short time period? Because we've been close to deals in the past few days and then talks have broken down. What do you think needs to be in that compromise?

Glaser: This is a hard time to really negotiate a compromise because the leaders of the various parties and various houses of Congress don't necessarily have the full support of all of their members, which means that the deals really need to be pretty broad-based in order to get the votes and the support that are needed to have them pass.

I think there are two things to look for; the first is kind of on process and the other is on policy. Process is important here because the Democrats feel that the Republicans shut the government down and are threatening with the debt ceiling, and that if the Democrats give in to any demands that's going to embolden the Republicans to just keep doing that over and over again. And that's going to create too much chaos so that Democrats can't give into this, and that they need to accept something that's fairly clean or only has very minor giveaways.

The Republicans, on the other hand, feel like the Democrats aren't negotiating with them in good faith, and really want to feel like they're bringing the Democrats to the negotiating table, that their concerns are being heard, and that they really have a seat at the table.

Now, I think a deal really needs to help keep both of those ideas that both sides can feel like the process is working in a way that they're happy with to get a deal done. And on policy, there really aren't policy positions that both sides want. You hear the Democrats talking again now about potentially trying to roll back some of the sequester change, some of those cuts. The Republicans, obviously, want changes in the Affordable Care Act and also in some other policy areas, as well.

I think we need to see a negotiation there, as well, and I think getting both of those prongs done could potentially give us a deal that has the ability to actually pass and get to the president's desk.

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