Wall Street just breathed a huge sigh of relief.
With a deal averting the fiscal cliff in hand, the bulls have
been out in force, sending the S&P 500 to its biggest two-day
rally since 1973. Although resolution of the fiscal cliff has given
themarket a very nice boost, the reality is that it's merely a warm
up for the main event. A much bigger and more important battle
looms just on the horizon.
I'm talk about the debt ceiling.
The United States hit its statutory debt limit on Dec. 31,
requiring the federal government to take special measures announced
last week in order to avoid a technical default, according to U.S.
Treasury Secretary Tim Geithner. Those "extraordinary measures"will
provide about $200 billion in short-term liquidity to keep funding
government spending, while putting Congress back on the clock to
find another round of solutions to the country's growing financial
Uncertainty over the debt ceiling makes the fiscal cliff look
like child's play. When Congress last battledissues with the debt
ceiling in August 2011, it sent shockwaves through the market, with
the S&P 500 falling 19%, just short of bear-market territory.
Take a look below.
The debt ceiling is incredibly important because of its impact
on the credit of the United States. In spite of the country's
growing financial problems, the United States is still considered
the safest borrower in the world. A creditdowngrade for the safest
borrower forces all other assets to be repriced as the "risk-free"
rate is compromised. And that can have a devastating effect
onstocks , as we saw in August 2011.
Despite this obstacle, I am stillbullish on stocks in 2013.
As I discussed here
, any path higher is bound to be mired with the usual volatility
and uncertainty that the market has gotten used to in the past few
Here are threeinvestments to help protect your portfolio from
short-term volatility with a big debt-ceiling battle on the
1.SPDR Barclays Capital Long-Term Treasury (
Thisexchange-traded fund (
) is linked to anindex that tracks U.S.Treasuries with an
averagematurity of 14 years. Although theyield of 2.66% isn't
exactly eye-popping, shifting capital intofixed-income is a great
way to diversify againstequity exposure.
Ironically, even though the debt ceiling threatens the credit of
the United States, Treasuries are still seen as a safe haven and
have seen big capital inflows during times of uncertainty. That
showed up last year whenshares jumped from $55 to more than $70 in
when the S&P 500 sold off on the debt ceiling battle. With
assets under management more than $3 billion and anexpense ratio of
just 0.15%, thisETF is a popular and low-cost method tohedge
against economic uncertainty.
2. Direxion Daily Small Cap Bear 3X Shares (
This ETF (exchange-tradedfund ) enables investors to bet against
stocks withleverage , providing three times the inverse daily
movement of the Russell 2000, an index of small-cap stocks.
Although shares have been trending lower the past few years, the
Direxion Daily Small Cap Bear 3X saw big gains during 2011's debt
ceiling battle, more than doubling in value to more than $60 a
share. Those big inflows have pushed the fund's assets under
management to $628 million just four years after debuting in
November 2008. Average dailyvolume of more than 20 million shares
provides plenty of liquidity and an expense ratio of 1.13% is only
marginally higher than the category average of 0.95%.
3. SPDR Gold Shares (
This ETF (exchange-traded fund) tracks the price of gold. Although
2012 was a relatively slow year for gold, gaining about 6% on the
year, the precious metal remains a favorite among investors
concerned about economic volatility,inflation and social unrest.
And SPDR Gold is a great way to invest in gold. Assets under
management of $72 billion make this one of the largest
in the market, while a tightbid-ask spread reduces price slippage
that investors are exposed to in thecash markets with bullion.
Although an expense ratio of 0.40% is above some of the lowest-cost
ETFs available, it is still less expensive than usingfutures and
options to invest in gold.
Risks to Consider:
A quick resolution to the debt ceiling could be good for
sentient and send stocks jumping higher, similar to what just
transpired with the fiscal cliff. Although a quick deal doesn't
look likely based on the trend and recent events, it would weigh on
defensive segments of the market.
Action to Take -->
The market just got a big boost from the resolution of the fiscal
cliff, but a much bigger battle looms with another debt ceiling
battle taking shape. Using these three ETFs could be a good way to
diversify against weakness in stocks and protect your portfolio
from debt-ceiling volatility.
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