While we prefer to avoid commentary on politics, our clients, colleagues and friends have encouraged us to opine on the debt-ceiling debate currently taking place in D.C. Thanks to Paul Touchstone for his thoughts on this subject.

There is no way to predict the outcome of this political exercise, though we continue to err on the side of probabilities and believe that both sides will work something out in advance of the Aug. 2 deadline.

Short-term rates and spreads are typically early indicators of stress in the capital markets. At this time, they are showing little in the way of increased volatility or risk. Perhaps this is an indication that regardless of the outcome of the debate, the U.S. Treasury will pay interest and principal on time as they avoid an actual default on their debt obligations.

While the politicians act hysterical and the media creates a frenzy, investors would do well to maintain cooler heads and focus less on the short-term effects and instead on the longer-term opportunities that are prevalent. These opportunities may actually become cheaper in the days ahead, in which case we may be compelled to add to our positions.

Of note, commodities are off to an upbeat start this quarter as global leading indicators remain positive, retail sales across the developed countries are healthy, and Japan’s industrial production rebounded sharply in April and May following the sharp decline in March due to the devastating earthquake and tsunami earlier this year.  

Some areas of the economy are decelerating, though corporate profits remain robust. Two-thirds of the companies in the S&P 500 Index have reported second quarter earnings and the results thus far have been solid. Seventy percent of the companies have beaten forecasts for bottom line profits and top line sales, which is the strongest showing since 2006 and 2004, respectively.

The Aug. 2 deadline will come and go and regardless of the resolution, markets will continue to ebb and flow. Our best defense is to remain disciplined in our approach and continue to set our sights on longer-term opportunities, goals, and objectives.