Markets can only crash when the masses aren't expecting it. And
if history is any guide, Congress just might push us right off the
The fiscal cliff is a combination of federal tax increases and
spending cuts that are scheduled to go into effect at the end of
2012. In an already-fragile economic environment, an increase
intaxes and a reduction in spending could pose a huge threat to
growth. Economists estimate that it could shave as much as 4% off
domestic growth in 2013 and cost theeconomy as many as 2 million
jobs, which could send the country into anotherrecession .
For the time being, the market remains uneasily confident that
politicians will cut a deal before the deadline and avoid an
economic crisis. But according to recent events,Wall Street has
very good reason to be nervous right now.
The last time Congress was involved in a decision this big, it
completely rocked the global markets. Remember August 2011? The
S&P 500 plunged close to 20% after the Standard and Poor's
downgraded the U.S.credit rating and Congress battled over the debt
The politicians have played chicken with the market before. Take
a look at the sharp pullback in the S&P 500 in the chart
Not only does Congress remain historically divided after the
recent election, but it will have limited time to set up a team and
pursue a deal.
When you put it all together, this is another very tough
challenge for the market and politicians. Battle lines are being
drawn. Getting deals done is very hard in a highly partisan
Congress. The only reason the deal on the budget got done last year
is because the market pressured politicians to find a solution. So
expect this to be a tough battle that goes down to the
And that means volatility.
But you don't need to be a Wall Street "guru" to take advantage
of the situation. The fiscal cliff could be a short-term
opportunity to make some long-term changes to your portfolio with
sector andasset allocation rotations.
So if you want to get a little more defensive and avoid the
uncertainty, here are threeinvestments that can survive the
adversities of the fiscal cliff:
1.iShares Barclays CreditBond (
I still think investment-grade corporatebonds are one of the most
underrated investments in the market. With 10-yearTreasuries
carrying a negative real return, the iShares Barclays Credit
BondETF 's almost 4%dividend yield looks quite
This exchange-traded-fund (
) is linked to anindex with more than 4,800 issues, providing
plenty of diversity and protection against stock-specific risk. And
with anexpense ratio of just 0.20%, below the category average of
0.23%, this fund offers value, too.
2.SPDR GoldShares (
This might seem like an unusual pick for this article, but gold has
seen some of its biggest inflows during times of panic. In August
2011, when the S&P 500 crashed, gold hit a new, non-inflation
adjusted, all-time high above $1,900 an ounce. And longer term,
even if Congress makes a deal to avoid the fiscal cliff, then
keeping taxes low and spending high is a virtual cocktail for
money-printing andinflation , which makes gold an
attractiveinvestment by contrast .
SPDR Gold Shares has high average dailyvolume for good liquidity
and an expense ratio below its category average. With assets of
more than $75 billion, it's one of the most popular exchange-traded
funds in the market.
3. ProShares UltraPro Short Russell 2000 (Nasdaq:
This would be a more aggressive way to play the fiscal cliff, an
exchange-traded-fund that provides three times the inverse for the
daily performance of the Russell 2000, an index of small-cap
It's important to understand that this isn't an investment. This
instrument is designed as ahedge against volatility and for
short-term use only. ProShares UltraPro enables investors to reduce
equity exposure from their portfolio with a leveraged short
position, bypassing individual stock trading, which would involve
more transaction fees. With an expense ratio of 0.95%, this ETF is
a little pricier, but still directly in line with its category
Risks to Consider:
Market volatility can dissipate as quickly as it appears. If
Congress is able to find a solution faster than expected, then it
would have a positive impact on sentiment.
Action to Take -->
The fiscal cliff is fast approaching, but the market isn't
panicking -- yet. If another round of sustained volatility rears
its head, then stocks will be under pressure. That makes this the
perfect time for some sector andasset rotations to get your
portfolio a little more defensive ahead of the big event. The three
options I mention in this piece are a great place to start.
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