Wharton’s Siegel: Dow Could Surge 1,000 Once Fiscal Uncertainty Ends

Monday, 01 Oct 2012 09:51 AM

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Any action in Congress ending fiscal uncertainty could send the Dow Jones Industrial Average surging 1,000 points, said Jeremy Siegel, economics professor at the University of Pennsylvania's Wharton School.

At the end of this year, Bush-era tax cuts and other tax benefits are scheduled to expire right at the same time pre-programmed cuts to government spending kick in, a combination known as a fiscal cliff that could push the country into recession if left unchecked by Congress.

"I think the most important event is not going to be on the election day, it's going to be after the election day as the fiscal cliff gets nearer and nearer. I think the resolution of that, one way or the other is going to be the market-moving event," Siegel told CNBC.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Adding to the fiscal cliff, the Patient Protection and Affordable Care Act calls for tax hikes on investment income while President Barack Obama has called for other tax hikes on wealthier Americans to help narrow deficits.

In the meantime, companies are putting off expanding and hiring until they know what exactly they will be paying in taxes, but just clearing up uncertainty alone would boost stock prices.

A congressional decision to just delay the tax hikes or spending cuts even for a few months while giving themselves more time to consider other longer-term deficit-reduction measures outlined by the National Commission on Fiscal Responsibility and Reform, chaired by Republican Alan Simpson and Democrat Erskine Bowles, would help as well.

"What I'd like to see is a six-to-nine-month extension so that the next Congress can work on it. They're not going to do Simpson-Bowles between November 6 and December 31st," Siegel said.

"There's no way anything like that can be accomplished. All they can do is say let's give this some time," Siegel added.

"I think that could mean 500 to even 1,000 points on the Dow just removing that uncertainty."

Siegel reiterated his call that by the end of 2013, the Dow could climb as high as 15,000 to 17,000, as by historical standards, stock prices remain attractive.

The Dow is currently trading over 13,400.

Investors, in the meantime, are bracing for a rough ride between now and the end of the year because of the fiscal cliff.

"In our minds, the odds of a volatility spike between now and January 1 are going up," said Joseph Balestrino, fixed income strategist at Federated Investment Management, which oversees assets worth $360 billion, according to Reuters.

"Risk-off will be in vogue for that period of time," Balestrino added, referring to risk-off trading strategies under which investors ditch equities and higher-yielding currencies and snap up safe-haven dollar positions.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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