Over the weekend, reports that the deficit cutting “super committee” was on the verge of failure began to circulate openly. I suppose we shouldn’t be surprised, but our purpose here is not to analyze politics and public policy, but to try to figure out what is going on and how it will affect our portfolios.
In this particular instance, our cue should come from the S&P downgrade of U.S. debt. Some observers were puzzled that the Dollar rose and Treasury bond yields fell. That seemed counter-intuitive. This morning we are seeing the same action at the market open: Dollar up, equity and commodity prices and Treasury yields down. In other words, the response from the markets is a pure “risk off” rotation.
Certainly, we cannot look at this in a vacuum. Much is going on in the world, and especially in Europe where things are still very much unsettled. If you subscribe, however, to the idea that we should be tune out political noise and look to the markets for a more reliable signal, this should tell you much about the standing of the U.S. in the global economy.
My specific read, as detailed in the weekend article at Seeking Alpha, is that the risk asset markets are under pressure. We are most likely looking at a move back into the summer trading range in equity indexes, perhaps even a re-test of the early October lows, in the near term. In the longer term I am still bullish on America, so this would represent an opportunity to buy more quality assets at discounted prices.