After one and a half years of negotiations, the White House and Congress rushed to make a last-minute deal on the budget that used 24,000 small-print words to raise very little in new taxes but extended federal unemployment benefits, provided lots of tax breaks for lawmakers’ pet projects, avoided any entitlement reform and failed to extend the debt ceiling.
The deal literally accomplished nothing to improve the direction or arc of the nation’s debt, and in fact independent assessments suggest that it most likely increases the debt. And with a new debt ceiling fight looming in February, along with fights over the delay of sequestered Pentagon spending cuts, there is more reason than ever to suspect the coming three months will lurch forward and side to side in alternating “risk-on,” and “risk-off” modes. We have to work hard to find value and map out opportunities to trade against the majority at risk.
The reality that cannot be escaped is that the federal government, companies and individuals have taken on too much debt. Somehow, some way, it all needs to be paid back. There are no magical ways to reduce it. And yet, ironically, most economists and portfolio managers agree that it’s important to expand private credit at the same time. It’s going to be a very difficult balance to achieve, and recent events don’t provide much ammunition for optimists.
Yet there is, indeed, reason to hope that this week’s gains in the markets were not a fluke:
- A lot of political hurdles were overcome in the past week,
- there’s a cyclical recovery under way in housing,
- the resolution of the fiscal cliff should unleash a lot of buying of consumer durables and industrial capital goods by individuals and companies and
- we’re at a time of record low interest rates, quiescent inflation expectations and a price/earnings multiple for the S&P 500 that is just 13x, vs. the 50-year average of 15x.
- And let’s not forget that tail risk from a European debt crisis has ebbed, and China seems to be on the path of recovery.
So, many positives. And the worries besides the debt? Well, to be fair, stock prices have risen a ton in the past two days already, not to mention the past year, corporate profit margins have clearly peaked and then there’s the elephant in the room: government cannot seem to get out of the way of business.
Put it all together and I am excited about the prospects for success in trading in 2013. We’re off to a good start but it is no time to celebrate.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
Professional traders and hedge funds make huge profits off volatility. Now, Jon’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX. Get more information on Trader’s Advantage and CounterPoint Options today.