With the fiscal cliff negotiations finally passing the House and Senate, it’s time to face the reality that markets will be dominated as much by politics as they will by economics in the coming year.
Debt ceiling worries here and concerns over the European Union will continue to produce rumor-mill style rallies and drops in equities worldwide. Every inflation number will be scrutinized, every durable goods report dissected as traders focus on predicting the next round of government intervention.
There are some ways to cope with the madness. Now more than ever, a long-term view is essential in building a sensible portfolio. Equity investors should heed to fundamentals Valuations will be an especially important metric. It will be vital to choose positions that offer enough runway to keep drawdowns as low as possible during the inevitable panic sell-offs that will likely occur in 2013.
Treasury securities will also be prone to speculative fervor, so increasing one’s allocation to corporate credit while reducing Sovereign exposure may make sense.
Ironically, the outlook for stocks is pretty favorable in the coming year. Buy-and-hold investors should do fine this year, but those trying to time rallies and pullbacks will likely have a much tougher time.