The Fiscal Cliff: Learning to Love It

After a strong start to the year last week, stocks pulled back today, with the Dow (DJINDICES: ^DJI  ) and the broader S&P 500 (SNPINDEX: ^GSPC  ) losing 0.4% and 0.3%, respectively.

For investors hoping that the "risk-on/ risk-off" dynamic might abate in 2013, last week was not a good augury. In fact, the VIX Index (VOLATILITYINDICES: ^VIX  ) , which reflects the market's expectations for stock volatility over the next 30 days, experienced its largest weekly decline (in percentage terms) since it was introduced at the beginning of 1990, as politicians produced an eleventh hour stop-gap agreement on the "fiscal cliff." Since across-the-board federal spending cuts -- which are the object of a heated political struggle between Republicans and Democrats -- have only been postponed for two months, don't expect politics to be far from the mind of the market. This is particularly true when one throws in the debt ceiling, which the U.S. will likely hit around that time, and the (thankfully remote) possibility of a U.S. default.

Ever since the credit crisis took hold, it has been a recurring complaint of fund managers that it has become a waste of time to focus on company fundamentals, as macro events and politicians' utterances buffet stock prices on a daily basis. However, if you're a net buyer of stocks with a long time horizon, you should prefer a market in which other investors lose sight of fundamentals – it's an environment that is highly likely to produce mispricings.

As such, value-oriented investors should be watchful for opportunity over the next couple of months, in case macro-inspired jitters produce indiscriminate selling of high-quality equities. The sectors to watch most closely are those that display the highest volatility to movements in the overall market (or highest beta, in academic terms): Financials, Materials, Energy ,and Industrials. Banks such as Bank of America (NYSE: BAC  ) and Morgan Stanley (NYSE: MS  ) come to mind. And don't forget defense contractors, because they carry headline risk with regard to cuts in defense spending. If a correction does occur, it'll be "sale on" for bargain-hunters.

To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy, and three reasons to sell. Just click here to get access.


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7/14/2014 10:03 AM
BAC $15.57 Up +0.19 +1.24%
Bank of America CAPS Rating: ***
MS $32.07 Up +0.66 +2.10%
Morgan Stanley CAPS Rating: ***

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