Markets generally indicate future concerns rather than present day obsessions, and true to form, fund managers appear to be preoccupied with the coming debate over the U.S. debt ceiling rather than the current government shutdown.
Debt ceiling-related worries are also overshadowing frustrations with the Federal Reserve's confusing communication about its plans for cutting back on quantitative easing. The U.S. central bank will have its October and December meetings to better indicate its intentions. A pullback could boost confidence about the economic recovery.
The most concerning aspect about the decision whether to raise the country's $16.7-trillion debt ceiling before that limit is hit on October 17 is what surprises could unfold in the process. Rating agency Standard & Poor's unprecedented move in the summer of 2011 to strip the U.S. of its triple-A credit rating reflected investor dissatisfaction with Washington's efforts to overcome its long-term fiscal vulnerabilities.
The mere threat of serious disruption to the global financial system will also likely keep the markets fidgety. That said, money managers predict that all this nervousness could end up being just what's needed to catalyze short to intermediate term bursts of volatility, prompting investors to realign their portfolios for long-term growth stories.
"There is a risk with the market at these high levels of something going wrong," Erik Davidson, San Francisco-based deputy chief investment officer for Wells Fargo Private Bank explained in a phone interview. Davidson helps to oversee $170-billion in assets. "Investors are understandably concerned, and this will likely bring more turbulence into the market for the next few weeks."
Davidson advises realigning portfolios by trimming back on U.S. stocks and re-allocating or parking money in areas that have been down year-to-date such as bonds and emerging market equities. Davidson explains that while he's still optimistic about U.S. equities, now could be a good time to begin trimming back on American stocks given their out-performance to other asset classes in 2013.
Mark Luschini, the Greater Pittsburgh area-based chief investment strategist at Janney Montgomery Scott, which has $58-billion of assets under management, suggests that retail investors capitalize on a pullback to buy equities with promising long-term investment stories.
"We suggest that investors put together a shopping cart of things they'd like to own," Luschini said during a phone interview. "So investors can be looking for opportunities in the stock market in both U.S. and non U.S. for equities particularly in those sectors that are more cyclically exposed. Those are mainly industrials, technology, energy and even in the financial industry."
Luschini says that Emerson Electric is an example of an industrial sector component that is "where the best opportunities lie" once the market overcomes the short to medium term issues concerning the debt ceiling negotiations. He said that this company will likely be a beneficiary of global growth picking up in the U.S. over the next 12 to 18 months and the pursuant capital spending revival. This time frame for U.S. growth acceleration is his base case estimate.
Luschini's liking of Helmerich & Payne meanwhile reflects his long-term bullish view on energy – driven by global demand and the U.S. increasingly becoming the supplier to that world demand – given the company's large exposure to American energy development and "state of the art fleet" of oil drilling equipment. Luschini said that the stock is cheap and also references its "fairly decent" dividend yield of almost 3 per cent.