As last week’s partial deal leaves lingering uncertainty surrounding the debt ceiling and other budget-related issues, investors should expect more late-night drama from the capitol in coming weeks and more resulting volatility for financial markets.
In particular, investors should be prepared for a rocky road around these three key first quarter dates in the ongoing budget debates:
- Late February: While the United States technically hit the debt ceiling on December 31, the Treasury can stretch its cash out for another six to eight weeks. This means that the country will run out of borrowing capacity sometime next month (nobody knows the exact date when this will happen). As such, by the end of February, Congress will need to raise the debt ceiling, dramatically cut spending or default.
- March 1: Spending cuts estimated at $108 billion for fiscal 2013 still loom. The sequester – the automatic spending cuts that the recent deal delayed for two months – will kick in on this date unless Congress acts before.
- March 27: By this date, Congress will need to pass additional legislation funding various government entities. On March 27, a resolution continuing such funding is set to expire.
The bottom line: Over the next three months, there’s a lot for Congress to argue over. And while a default isn’t a real risk, the upcoming fight over the debt ceiling and budget – like the fight over the fiscal cliff – will likely go down to the last minute and lead to increased market volatility.
In this environment, I like investments that potentially offer some downside protection, i.e.:
- High-quality, international dividend-paying stock funds such as the iShares Dow Jones International Select Dividend Index Fund (IDV);
- Global mega capitalization stock (mega caps) funds such as the iShares S&P Global 100 Index Fund (IOO) and
- Minimum volatility funds such as the iShares MSCI All Country World Minimum Volatility Index Fund (ACWV).
Russ Koesterich, CFA, is the BlackRock Global Chief Investment Strategist.
The author is long IDV and IOO.
There is not guarantee that dividends will be paid. ACWV may exhibit more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.