Political Dysfunction Remains Primary Risk
With 2012 drawing to a close, it is really difficult to believe that American politicians have yet to resolve the fiscal cliff. Just a few years ago my good friend Ian Bremmer of the Eurasia Group identified political risk as his greatest concern. Unfortunately, that’s even truer today.
Washington has become completely dysfunctional. In addition to the fiscal cliff, the country is once again coming close to the debt ceiling. A failure to resolve both issues could result in another round of credit rating downgrades. As bad as that sounds, it’s not clear what the consequences will be. The last time our credit rating was reduced, Treasury interest rates went even lower.
No doubt the dysfunction in Washington will cause increased volatility in stocks. To a large extent, retail investors have reduced their holdings of equities. The financial crisis of 2008 was so traumatic that many of them got out and stayed out. However, another round of heavy selling, if it occurs, should be viewed as an opportunity for long term investors to get back into the market.