Gridlock in Washington and all that could possibly go wrong with the economy if a deal is not reached have grabbed the headlines, but the negotiations leave room for stock market gains. Congressional leaders said on Friday they would work through the Thanksgiving holiday recess to find a solution.
“The debate over how to solve [the fiscal problem] may be more productive than is commonly recognized,” said Brad Lipsig, senior portfolio manager at UBS Financial Services in New York.
“The US is facing a major debt overhang, and serious steps toward addressing it might ultimately be viewed as a positive for future growth,” he said. “The market may recognize this and, after a time of hand wringing, recover from the concerns with a renewed sense of optimism.”
The recent selling took the S&P 500’s relative strength index — a technical measure of internal strength — below 30 this week, indicating the benchmark is oversold and due for a rebound.
The RSI in four of the 10 S&P sectors — utilities, telecoms, consumer staples and technology — is below 30 and the highest RSI reading, for the consumer discretionary sector, is below 40, suggesting a bounce is in store.
“What I want to do is what we did during the decline following the budget negotiations in the summer of 2011: The lower the stock market goes, the more I want to own stock,” said Brian Reynolds, chief market strategist at New York-based Rosenblatt Securities.
“If we go off the cliff it will be with a bungee cord attached,” Reynolds said.