(John Melloy) You can sense almost an air of desperation from David Kostin, Goldman Sachs chief U.S. equity strategist, in his latest note to clients as he pleads with them to take money out of stocks before they fall off the fiscal cliff.
In the note, Kostin vehemently defends his year-end S&P 500 [.SPX 1418.13 -0.03 (0%) ] target of 1250 despite the benchmark’s recent rise to above 1400. The strategist still sees a 12 percent drop ahead, believing that Congress will fail to address the fiscal cliffbefore the election, and maybe even before the end of the year.
“Political realities and last year’s precedent suggest the potential that Congress fails to reach agreement in addressing the fiscal cliff is greater than what most investors seem to believe based on our client conversations,” said Kostin.
The so-called fiscal cliff is the expiration of payroll, capital gains and dividend tax cuts at the end of this year. It also refers to the mandatory sequestration of spending that resulted from the vicious debt ceiling fight last summer.
“Last year, the deadline for Congress to raise the federal debt ceiling (explain this) was known months in advance,” states the report. “Nevertheless, Congress was unable to reach an agreement that satisfied all factions. Investors were stunned and the S&P 500 plunged 11 percent in 10 trading days.”
The worst case scenario this year is that a lame duck Congress does absolutely nothing after the election – not even kick the can down the road by voting in a short extension of the tax breaks and spending plans. Under that scenario, 2013 GDP would actually contract, according to Goldman Sachs economists.
What’s more likely is an extension of some of the more impactful tax cuts and spending plans (like those effecting defense). (Read More: “How Much Will It Cost You If Bush Tax Cuts End? A Lot”). But that is still a failure to address the issue full-on before the end of the year and that continued uncertainty will still hurt the economy and market significantly, according to Goldman.
“We believe the uncertainty is greater this year than it was 12 months ago,” wrote Kostin.