Ideas to manage the "Debt Ceiling" risk

The market remains muted during the debt ceiling debacle or Kabuki theater, as Mayhem likes to call it.

Equities remain flat and chop sideways. This is actually quite reminiscent of prior debt ceiling episodes. The market remains confused and trades sideways.

Against a tough macroeconomic backdrop however, the market has usually moved lower once the Debt Ceiling issues have been resolved.

We will be discussing the issues in more details during our Twitter Spaces tomorrow at 12pm ET. Please join us with you questions as we hope to make it an interactive session.

In the meantime, we wanted to present a few ideas of what has done well in the past. Our best bet here is taking a defensive positioning.

Here is a chart from Morgan Stanley that shows how the sectors and factors performed before and after the 2011 Debt Ceiling issue.

Long XLP 

Consumer Staples - Defensive positioning. While I realize that with inflation declining, many of these companies are losing their pricing power, and margins are being compressed. Consumer Staples still remains a place to hide during tough times.

XLP has been “red” over the last few days but fund managers continue to add the position. YTD the ETF has actually performed relatively well.

Long SPLV and Short SPHB 

Long Low Volatility; Short High Beta - This was Mayhem’s idea from a couple of weeks ago. We wanted to reiterate it here because it fit the overall thesis of late cycle / defensive play.

If you look at the chart below, the call was made in April and since then the strategy has performed well. We now see a bit of a dip in the chart, and this may be a good time to add some more.

This by no means is a sure shot and doesn’t mean it has to play out that way. But, adding some of this exposure to our portfolios could be helpful in times of distress. As it is, we are in the part of the macro cycle where these ideas should do well.

This is not investment advice. Please consider your portfolio and sizing before making any trades.