Election Night balloons deflate quickly; huge deficits do not
CHICAGO (MarketWatch) — Whether you exhaled or gasped over the presidential election’s result, there’s no denying what comes next: a deficit and budget slugfest that will play out against a vulnerable U.S. economic recovery and Europe’s own debt mop-up.
That means if you believe that the so-called fiscal cliff, in the shape of a planned $600 billion of federal spending cuts and higher taxes, threatens the growth-stock strategies favored during the election runup, it may be time for a little insurance.
Stock-market Armageddon portfolio? Not quite. Canned beans? You bet.
David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates, trotted out his “four horsemen of risk” in an August commentary, a time when trading screens flashed green and candidates’ grins flashed white.
Rosenberg’s sober point then and now: The White House occupant won’t matter much because Europe is unstable; severe drought drove up food prices in the U.S. and globally (so, yes, we need to talk about inflation); demand for U.S. exports is weakening, and the fiscal cliff, which he says threatens to erase three to five percentage points from U.S. GDP.
So, how do investors position their portfolios against the four horsemen of President Obama’s second term? First, look at each risk individually:
Central bankers in developed nations will be reluctant to raise interest rates while Europe drags down global growth.
With that in mind, bond and exchange-trade-fund strategists at BlackRock Inc. offered a list of bulk goods for your portfolio pantry: Corporate debt and tax-exempt municipal bonds, gold and (most) commodities.
These categories look attractive relative to stocks and government bonds given expectations for an extended stretch of low U.S. interest rates. President Obama will likely retain the mostly dovish Federal Reserve Board, for now.
“Focus on income rather than capital appreciation in higher-yielding fixed income [investments],” says Jeff Rosenberg, chief investment strategist at BlackRock Fixed Income. But, he adds, “Watch out for the moment when inflation or economic growth pushes up rates. One strategy is to be relentlessly neutral; buy undervalued assets and sell similar, but pricier, ones.”
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