The so-called political crisis is over for the time being. In reality, the bickering in Washington never represented a crisis, merely the dysfunctional posturing that passes for leadership these days. Markets seem to have seen through the charade as they are near all-time highs.
There is a real crisis ahead, although it is not clear when and how it arrives. It will be economic in nature and politicians will be helpless when it comes. Markets at these levels seem way too high for anyone with these expectations. Politics, at least political interventions, have driven them to these heights and might be able to drive them much higher for a while.
There is upside potential associated with continuing Federal Reserve liquidity measures. Increases in inflation, a stated goal of the Fed, usually bodes well for common stocks, at least in the short-term. There is no political will to stop stocks from levitating. Indeed, every effort will be made to keep the Wall Street music going.
Markets ultimately overpower politics. That is what makes participation in these markets so dangerous. The critical issue is when and how much markets might correct. No one has that answer.
I believe that these markets are overvalued. Yet I also think they could go much higher. When this service started back in January of this year it was stated that the risks of being out of markets might be as high as the risks of being in them. The momentum-volatility ETF strategy was chosen as a way of staying in at what was considered reasonable risks.
The opportunity cost of missing an explosive move upward was cited as the risk associated with being out of markets. This opportunity cost was higher than most expected. Thus far this year SPY is up 24.3%, The US(6) momentum-volatility rankings earned 35.4% for this same period. The returns from the rankings are based on a monthly buy and hold strategy, without stops to reduce losses (or possibly gains). Stops are recommended each month as downside risks can be substantial in these markets.
The strategy has worked well, although there is no assurance that it will be successful in the future. These are especially dangerous times and all investing involves risk of loss of principle.
I am happy to have remained in markets, but am even more concerned about future returns than in January. The risks of a downside correction are likely greater now than then. Unfortunately common stocks are the only area where returns ahead of inflation are likely. It is not a game that I want to be in, but it is the only one left.
The Latest Look At Market Internals
Through October 18, the momentum-volatility rankings of asset classes appear as follows: