Although it rarely pays to completely exit jittery markets, investors would be wise to position their portfolios defensively.

In the first four days of June, the S&P 500 and NASDAQ gave up almost 4 percent of their value, while the Dow Jones Industrial Average lost 2.5 percent in just eight days. Since then the markets have been mostly flat in the face of weak US economic data and continuing worries that the European sovereign debt crisis may lead to another recession.

More than a year after Greece received a USD158 billion bailout package from the EU, the nation’s debt crisis continues to roil Europe. Meanwhile, the peripheral economies of Portugal, Spain and Ireland may be in peril. Ireland’s economy has flagged after the government imposed strict austerity measures to combat with the country’s mounting debt. Analysts argue that forcing Greece to impose similar measures may be counterproductive, particularly as banks on both sides of the pond have significant exposure to debt issued by the PIIGS (Portugal, Ireland, Italy, Greece and Spain). EU policymakers are caught between a rock and a hard place.

In the US, May’s employment report showed that only 54,000 jobs were created in the month due to weakness in the retail, construction and automotive sectors. Housing data showed that real estate prices continue to fall in many parts of the country; the Case-Shiller Price Index plunged below levels last seen during the 1920s. On top of that, many economists have predicted that the price of gasoline will climb above $5 per gallon this summer, threatening retail sales growth.

US politicians have not inspired confidence in the markets. At the time of writing, the Obama administration and House Republicans are locked in a battle over raising the nation’s debt ceiling. The Treasury Department estimates that the government will run out of money in early August if the debt ceiling isn’t raised. This outcome would represent a technical default and could undermine investors’ confidence in US Treasury bonds.

Republicans have demanded that any bill to raise the debt ceiling be accompanied by deficit reduction measures. Few would deny that reducing the deficit would benefit the economy; it’s estimated that a $4 trillion deficit reduction would produce an additional 1 percent in annual gross domestic product growth. But the Democrats’ counter argument also carries weight. Democrats have argued that any spending cuts could stall the already-sluggish rate of economic growth, especially after the second round of quantitative easing concluded last month. Many economists have already lowered their forecasts for US economic growth in 2011.

The debate over the debt ceiling reflects two fundamentally divergent views on how to ensure the health of the economy. But this isn’t an intractable problem. We’ve seen similar debates each time the US has raised the debt ceiling, and the two sides have always reached a compromise.

Although the latest economic data is troubling, it doesn’t foretell another recession. May’s employment data was influenced by seasonal factors as well as supply chain pressures resulting from the Japanese earthquake and tsunami. There were also bright spots in the real estate data; prices stabilized in about half the markets that comprise the Case-Shiller Index.

The odds of another recession are long. But investors should nonetheless gird themselves for a textbook market correction this summer. Trading volumes are typically light in the season and any bad news could depress markets. Investors seeking to preserve capital should shift their portfolios to a more defensive posture. When in doubt, gold and Treasury bonds are excellent safe havens.

Gold prices have flat-lined in June, but SPDR Gold Trust (NYSE: GLD) has posted an almost 7 percent gain year to date. Although market watchers debate the sustainability of gold prices, the yellow metal will continue to benefit from safe-haven buying.

Cautious investors have already sought shelter in Treasury bonds; the yields on 10-year Treasuries fell to fresh lows at the end of May. We recommend looking closer in on the maturity ladder as worries over the US budget could push real interest rates higher.

IShares Barclays 3-7 Year Treasury Bond (NYSE: EMB) sports a 4.8-year average weighted maturity as investors have sought out shorter-term bonds. The fund will be cushioned against any significant move in real interest rates. It will also serve as a hedge against market volatility while providing shareholders with a 1.9 percent yield.