David Kotok: S&P Could Hit 1,600 if Politicians Don't Kill Recovery

Wednesday, 11 Jul 2012 08:50 AM

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The Standard & Poor's 500 Index could climb to 1,600 by 2014 from about 1,350 today provided D.C. politicians don't derail recovery with botched policies and finger-pointing, says David Kotok, chairman and Chief Investment Officer of Cumberland Advisors.

Meanwhile, a European Union decision to provide Spain with $35 billion in emergency loans to prop up its banking sector won't work, as the move fails to address Europe's fundamental problems of too much debt and too little growth.

In the U.S., hiring remains at bay as does consumer confidence and spending, largely in part because the country remains wary over the fate of the economy.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

While the Federal Reserve has injected the economy with liquidity and cut interest rates to spur recovery, lawmakers often argue over the role of taxes and spending in recovery, as evidenced by the brinkmanship during the 2011 debt ceiling impasse that nearly through the country into default.

At the end of the year, a series of tax holidays and benefits, including the Bush-era tax cuts, expire, while automatic spending cuts agreed upon during the debt ceiling agreement kick in.

The combination of the two, known widely was a fiscal cliff, could siphon hundreds of billions of dollars out of the economy next year and derail recovery, sending the country back into recession if left unchecked.

Don't expect Washington politicians to rush to fix the problem in an election year, Kotok tells Yahoo's The Daily Ticker.

"In the U.S., we face political headwinds. These characters that we put in office in Washington give us no certainty and no confidence," Kotok says.
"They are busy squabbling with themselves. There is a reason Congressmen are as popular as scorpions."

Conflicting game plans to battle the fiscal cliff in the press add to confusion as well.

"I don't think we have a clue as to what they are going to do or how they are going to get their acts together," Kotok says.

"We hear everything from a three-month extension to 'we'll do it in the lame duck' to 'let's let it all expire and then we'll re-debate it and then we'll make changes and bring them back retroactively.' If you are a businessman or an investor or taxpayer, somebody, a fiscal agent or retiree, how do you plan your life and your financial future when that's what you get from your elected leadership in Washington?"

Still, Kotok is sticking with a bullish price target.

"I still think we can see 1,550 or 1,600 two years from now if the idiots in Washington don't derail it," he says.

Meanwhile, expect headwinds out of Europe to slow the global recovery as well.

European Union finance ministers agreed to rush about $35 billion from a recently approved $125 billion rescue fund to Madrid to help the country stabilize its banking sector.

Recession and debt, however, remain a problem there and elsewhere in Europe.

"This latest twist in Spain is a speck," says Kotok.

"The problems in Europe are not being solved. The peripheral economies are contracting [and] you're still running deficits, which are expanding the debt."

Talk is growing at home that the Federal Reserve will feel pressured again to stimulate the economy via liquidity injections known as quantitative easing, under which the U.S. central banks buys assets like Treasurys or mortgage-backed securities from banks, pumping them with liquidity to spur recovery.

The Fed has already bought $2.3 trillion in assets during two rounds of quantitative easing since the downturn, but experts say monetary policy tools produce diminishing returns, and the more the Fed steps in, the less benefits result from its actions.

"The global economy is in the midst of a synchronized slowdown, as reinforced by the recent spate of weak economic data," says Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch, according to CNBC.

"Unlike 2008, monetary policy easing appears increasingly ineffective while fiscal policy is headed towards contraction in most countries."

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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