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USAA Market Commentary: A Cliff Hanger?

December 3, 2012

So expect market ebbs and flows in the days and weeks (and, we hope, not months) ahead as commentators become either hopeful that a fiscal cliff agreement is imminent or doubtful that a deal can be agreed upon.
-Dan Denbow, assistant vice president of equity portfolios, USAA Investments

With most investors intensely focused on the "fiscal cliff" negotiations taking place in Washington, we expect some volatility heading into year-end. Although we expect a deal to be reached eventually, dampening the effect of the total estimated $600 billion-$700 billion in automatic austerity measures (tax hikes and spending cuts) that would likely throw the U.S. into recession next year, the timing and nature of any agreement is impossible to predict.

So expect market ebbs and flows in the days and weeks (and, we hope, not months) ahead as commentators become either hopeful that a fiscal cliff agreement is imminent or doubtful that a deal can be agreed upon.

We would also remind investors that we view the cliff not as a one-time event, but as a series of several cliffs to be navigated from a long-term perspective. By this we mean there is a high likelihood of many austerity measures, such as tax hikes and spending cuts, which could be an economic depressant for years to come. We expect inflation-adjusted U.S. economic growth to continue to muddle through, averaging only about 2% or so annually, with a heightened risk of recession.

Because of this, we are slightly overweight in bonds in our diversified managed portfolios, favor emerging market stocks vs. U.S. stocks, and remain overweight in gold and gold mining stocks.


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