With the end of the government shutdown and the lifting of the debt ceiling, it’s time to review how we’ve positioned Pinnacle’s portfolios. First, our stance has been that the political impasse was mostly noise — that’s why we didn’t pull volatility down over the past few weeks. Washington’s politicians waited until the last minute, hoping to force some policy concessions, but had to acknowledge the practical reality that making a deal was better than the alternative.
In terms of the economy, it wouldn’t be surprising to see a couple punchy data points come out in the wake of the impasse. Our belief is that the economy will likely bounce back quickly now that a deal is done. That was the case in 2011, as described by one of our research providers:
The 2011 govt deficit debate was resolved on August 2 with the Senate’s passage of a compromise debt plan. And the economy recovered thereafter:
- Payroll employment increased just 78k in July and 132k in August. However, in September in increased 225k. And for 4Q of 2011, its average gain was 188k per month.
- Real retail sales, 3 mo. avg. 3 mo. % a.r., were a very weak 0.3% in July. In August, they started to accelerate and, by December, they had accelerated to 6.7%.
- Real GDP in 2011:3Q expanded just 1.4% q/q a.r. In 2011:4Q, it reaccelerated to 4.9%! And it increased a strong 3.7% in 2012:1Q.
One thing to keep in mind is that the 2011 govt deficit debate occurred in the midst of the Arab Spring and Eurozone Turmoil, all of which contributed to the plunge in consumer confidence. However, today, there are fewer exogenous headwinds, and the private sector is less fragile.
Today we have maximum liquidity support from the Fed (Janet Yellen is positive for markets), gas prices have been dropping, and overall commodity inflation is nonexistent. Yields and the dollar have also been weakening, which are both reflationary impulses. Also, the global economy was building momentum prior to the impasse, which should help it through this short-term headwind. So we might see some weak data points and a few companies might highlight the shutdown in their earnings reports. But so long as the deal is done, we think the weakness is temporary and the market will end up looking past short term problems.
We are maintaining benchmark weightings in all strategies, though we’re discussing the possibility of adding volatility on the possibility of a 4Q rally. We are selling TLT (after a slight run up) and buying a small amount of 10-year bonds to maintain a hedge, which will now pull bond duration (interest rate sensitivity) down even further — to about 70% of benchmark weighting.