Ben and BarrySince the start of the Global Financial Crisis, markets have taken their cues from government policies, political crises and Central Bank interventions. According to the classic Keynesian thinking, this is to be expected as government steps in to make up for failing private sector demand. But also according to Keynesian logic, we should start looking for the government to withdraw as the private sector picks up the slack in a recovery.

Although equity markets still managed a swoon for the messy outcome of the Italian elections, the relatively quiet passing of the “Sequester” is one of the early signs that market participants are starting to look beyond the Beltway for future earnings. Despite all the dire warnings from the politicians, investors decided that they have seen this movie before.

On the S&P500, as represented here by SPY, the markets have basically been flat for the month.

SPY
Source: Yahoo Finance

Gold, represented here by GLD has been drooping down with only a slight flutter for the Italian election debacle.

GLD
Source: Yahoo Finance

The markets are saying…

To Washington: that they like the idea of some fiscal restraint and can see through the blatant attempts to make the spending cuts as politically painful as possible.

To the Italians and Europeans: that the Italian election is not the worst thing we have seen come out of Europe in the last 5 years. Germany will foot most of the bill for Europe’s financial reconstruction and it will drive the long, slow agenda to put the Euro back on a sustainable course. Nothing to see here, folks, move along…

Meanwhile over at the Federal Reserve…

Although I personally missed the release of the Federal Reserve’s 2012 unaudited annual report, the Mises Institute put out a readable analysis of the changes. Not all is good news (the Fed is loading up on Mortgage Backed Securities), but overall it appears that the tide is changing. The balance sheet actually shrunk slightly year over year and the FED’s holdings of Treasuries has fallen slightly. The author even finds evidence that the banks are starting to lend more to actual customers rather than simply moving electronic pots of money around the various servers at the FED.

Moderately bullish markets call for moderately risky weightings

Wall Street’s top strategists are calling for a tight range on this year’s performance for the S&P500 (-6% to +7%). In general, the big bears are hedging after being wrong last year while the bulls are struggling to come up with the massive earnings growth figures that their models need to support a big run. What most of them are missing is that the decreasing anxiety amongst investors is raising the appetite for risk assets (primarily equities) over safe assets (like Treasuries). The shift will not be dramatic in terms of percentage points of portfolios reallocated but it will be enough to boost stocks into double digit gains for the year. Risk has not gone away but investors are becoming more comfortable with the risks that are in the market and are willing to pay up a bit to capture more potential growth.

The FundLogik portfolios are still leaning towards riskier assets and investors are still climbing a “Wall of Worry,” a healthy sign in a moderately bullish market: Maintain current weightings.