With the fiscal cliff on the horizon, jittery investors have been pulling money of equity investments at a steady clip. In the week ending November 20, for instance, investors yanked $8.82 billion out of stock mutual funds, according to the Investment Company Institute. The week before that, the number was $8.39 billion.
These bruising outflows represent concern on the part of investors that a failure by Congress to reach a budgetary agreement by the end of the year, which would trigger a combination of tax hikes and steep spending cuts, would catapult the economy back into a recession.
As uncertainty mounts, investors of all stripes are seeking tactical places to tuck away their money in the near term. As such, one lingering question on the minds of many of them is this: Where is it possible to find value in the coming months?
Jeffrey Kleintop, the chief market strategist at LPL Financial, suggests that municipal bonds could present an attractive buying opportunity in anticipation of rising tax rates. If rates increase substantially, wealthy investors looking for tax-favored investments might start buying up municipal bonds, which would drive up their prices. Given that possibility, Kleintop argues that muni investments "are priced not only well, but I think [you could] see some appreciation there."
Frank Fantozzi, the CEO of the Ohio-based Planned Financial Services, agrees that munis are an attractive option. "We feel that [they're] going to do much better than U.S. treasuries," he says. Kleintop offers an even more sobering outlook for treasuries, noting that the potential that U.S. debt could be downgraded, coupled with the chance of rising interest rates, could make treasuries a dangerous investment in the coming year. "Fleeing to what appear to be the safest securities may not be [good] in 2013," he says. "That safety may turn out to be one of the riskier investments to hold."
For investors who are looking to stay invested in stocks, Fantozzi recommends looking at the healthcare and construction sectors, which he expects to hold up fairly well in the months ahead. However, Fantozzi predicts that if Congress fails to act, the Dow Jones Industrial Average could sink by 1,000 points between now and the end of the year. "First and foremost, we feel that we would be taking a bearish approach to investing," he says.
Recently, the market has been quite volatile, with almost every new signal from Congress noticeably moving stock prices. Suggesting that such volatility is likely to continue, Kleintop notes that investors could conceivably profit from seesawing prices by investing in products such as the iPath S&P 500 VIX Short Term Futures ETF (ticker: VXX). This ETF seeks to provide investors with access to the VIX Index, which measures price volatility within the S&P 500. "In the near term, over the next couple of weeks, I think volatility is going to be pretty high," he says.
How long could the volatility continue? That, of course, depends on how successful Congress is at negotiating a budgetary resolution. Kleintop, for one, remains optimistic. "I think we will ultimately come to a deal before the end of the year," he says. "It's always darkest before the dawn. But I think we have a bit more darkness to come here."
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- Investment Company Institute