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For all the fretting over the fiscal impasse in Washington, the market impact so far has been slight. The S&P 500 is just 1.3 per cent below its record high. And the yield on the 10-year U.S. Treasury bond is a low 2.73 per cent – up from 2.6 per cent earlier this month but below the recent high of 3 per cent – even with the whiff of default in the air.

Yet, the market is reacting in subtle ways. And, oddly enough, investors can take some comfort from the reaction.

Strategists at Pavilion Global Markets noted that fund managers have raised their cash levels to 4.7 per cent. While that might not sound like a wholesale dismissal of equities, it does mark the highest cash level since 1997 and reflects growing uncertainty among the pros over how (and when) this crisis gets resolved.

Individual investors are also cautious. During a year in which equity mutual funds have seen impressive inflows of cash, the past couple of weeks have seen outflows of some $7-billion (U.S.). The percentage of investors declaring themselves to be bearish, with a dim view of the market over the next six months, is also on the rise.

But far from suggesting oncoming market mayhem, these indicators point to a potential relief rally ahead. According to the Pavilion strategists: "The good news is that, so far, the lack of buyers has had limited impact on financial markets. The better news is that once the fiscal drama is resolved, the sidelined money will be redeployed, giving the stock market a second wind."

The key phrase here, of course, is "once the fiscal drama is resolved." The bullish case for stocks assumes a resolution, presumably before any lasting damage is done to the U.S. economy. For now, markets are sticking to the belief that such a resolution will arrive in time, thanks largely to the last time markets were subjected to political paralysis.

"Last time, a deal got done long before even a tiny, technical default was a remote possibility," noted Ryan Avent at The Economist's Free Exchange. "And America then went on to continue to provide lots of nice Treasuries while also stabilizing growth in public-debt-to GDP and managing decent (by rich-world standards) output growth and stable inflation. And kept on being innovative and open and dynamic in a way none of the world's other large economies manage."

There is little reason to believe this time is different.

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