Last week, investors cheered that Washington
managed to eke out a deal at the 11th hour
. But despite any headlines to the contrary, the debt ceiling
deal wasn't all good news. Here's a quick look at the good and
bad news and its
implications for investors
The Good News
The Bad News
The short-term deal solves nothing.
While the deal did temporarily extend the debt ceiling and end
the government shutdown, it didn't solve the country's
long-term issues and the economy is still struggling. The
market will face the same issues again in early 2014, at which
point not much will have changed.
By most political metrics, such as voting records, both the
House and the Senate are more polarized than they have been in at
least a century. Given how far apart the two parties are
philosophically, the type of short-term deal that was struck last
week may become a template for what to expect over the next year,
and potentially for the next three, if the political status quo
holds after the 2014 mid-term elections.
And while the United States isn't in danger of a recession,
slower growth isn't consistent with the continuous rise in US
valuations. US stocks are now trading at roughly 2.5x
, a 15% increase from the end of 2012.
So what does this mean for investors?
I expect that continued Fed accommodation will help support
stocks, which look reasonable on a global basis, over the next
six to 12 months. However, last week's rally seems aggressive for
a few reasons: All Congress could fashion was a temporary
solution, economic growth remains soft and the Fed will likely
start to taper at some point in the next six months or so.
In addition, though US stocks still look reasonable compared
to their historic valuations, they are looking fully valued
relative to an environment of 2% growth. Though I continue to see
good bargains outside the United States, there are fewer bargains
in the US market.
As such, I continue to advocate that investors consider
raising their allocations to international equities, and within
the US market, the energy and technology sectors appear to be
more reasonably priced. Finally, given that I expect the Fed to
implement a more conservative taper, I'm now advocating that
MBS relative to other fixed income instruments.
Russ Koesterich, CFA,
is the Chief Investment Strategist for BlackRock and
iShares Chief Global Investment Strategist. He is
a regular contributor to
and you can find more of his posts