“Expect the best. Prepare for the worst. Capitalize on what comes.” Zig Ziglar
This is exactly the approach I am taking in this post-election, pre-fiscal cliff window of time.
Expecting the best means hoping that both sides (Democrats and Republicans) will manage to get over their ideological differences and do the right thing for the country. In my opinion, that requires both some increase in taxes and some cuts in spending. My sense is that the President does not want his legacy to be 2 recessions during his presidency, which is surely what will happen if he doesn’t compromise and the Republicans, who got their butts kicked in the election and don’t want to be held accountable for forcing a recession either, will find the common sense to strike a balanced agreement before the deadline.
Prepare for the worst means keeping a sizable allocation to cash and other short-term, low volatility investments in anticipation of the turmoil in the financial markets that would result from a failure to get a deal done by December 31st. Please note that while I am sure the market will react negatively to a political stalemate, I do not anticipate anything like the decline that occurred back in 2008 during the financial crisis. Nor do I think the impact to the economy will be as dramatic as the last recession.
Capitalize on what comes means remaining calm, sticking with our long term, diversified approach and being prepared to move quickly once the dust settles. Even if our elected “leaders” fail to do their jobs before the January 1st deadline, I am almost certain they will quickly realize their error and a deal will get done early in 2013. This has been our history. When something absolutely has to happen, eventually it does. For example, in May of 1974 New York City was insolvent, September 1979 saw the dollar implode, in January 1980 inflation soared to 18.1% with short-term interest rates spiking to more than 20%, the October 1987 “crash”, the Internet bubble of 2001, not to forget the Enron/ WorldCom debacle(2002) – the Lehman Brothers bankruptcy and financial crisis (2008) – GM’s bankruptcy (2009) – the Flash Crash (2010)– the downgrading of U.S. credit rating (2011). (Source: Raymond James & Associates) After each one of those crises (many caused by our politicians) the economy, and the stock market, survived and then prospered.
As scary as the news media is painting the “fiscal cliff”, economic indicators are currently improving both in the US and globally so the actual impact of going over the cliff may be mitigated. Below is a chart from International Strategy and Investment showing their Global Economic Diffusion Index, which shows the # of economic indicators improving versus those declining. ISI estimates global GDP (Gross Domestic Product) increasing from 2.5% in 2012 to 3.3% in 2013.
In summary, I am expecting the best but preparing for the worst while remaining ready to capitalize on what comes.
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