Despite the risks, there is room for guarded optimism.If there ever were a time to enact long-term fiscal discipline, now is that time. The United States’ large and unsustainable budget deficits helped push total U.S. debt over 100% of Gross Domestic Product (GDP) in 2012. Previously unmentionable as part of the “third-rail” of politics, wide-reaching bipartisan proposals have been unveiled to put the United States back on a path to fiscal sustainability. A long-term solution of permanent changes to tax rates and entitlement programs as well as ending the battles over the debt ceiling could emerge in 2013. This path would be welcomed with a bull market and lift the uncertainty plaguing business leaders and investors alike.
The battle is likely to result in a compromise that averts the worst-case outcome, but the negotiations themselves, coming on the heels of hard-fought election battles, may drive market swings. Fortunately, the lowest valuations for stocks in 20 years may help to limit downside and create potential investment opportunities. Which of these three paths will prevail is largely driven by the compromise — or lack thereof — in Washington.
The Paths of 2013
Depending upon the path taken, certain areas of the markets will perform differently than others.
Source: LPL Financial Research 11/26/12
Jeffrey Kleintop is Chief Market Strategist and Executive Vice President at LPL Financial. In this role, he leads the development and articulation of LPL Financial Research’s market and investment strategies, leveraging his expertise in the analysis of global financial markets and asset allocation strategy.
Burt White is responsible for the strategic direction and continued growth of the LPL Financial research platform. His role includes setting the vision for superior research capabilities and enabling the delivery of conflict-free, objective investment advice by LPL Financial advisors.