Pimco's Kashkari: Volatility to Worsen on Fiscal Cliff 'Brinksmanship'

Thursday, 08 Nov 2012 03:47 PM

 

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Stock-market volatility will increase by the end of the year as Congress delays reaching a resolution on extending spending and tax cuts until 2013, according to Pacific Investment Management Co.’s Neel Kashkari.

“There have been little signs of Republicans and Democrats really coming together to solve the fiscal cliff in a bipartisan matter,” Kashkari, who heads global equities at Newport Beach, California-based Pimco, said at the Bloomberg Portfolio Manager conference in New York. His firm manages about $8 billion in stocks and $1.92 trillion in total assets.

“More likely, we’re going to see brinkmanship like we saw with the debt ceiling a year ago.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Democrats maintained control of the U.S. Senate in the election results this week as Republicans kept their majority in the House of Representatives. Lawmakers face the so-called fiscal cliff, or $607 billion of tax increases and federal spending cuts set to kick in automatically in January. The Congressional Budget Office has said the economy would contract by as much as 0.5 percent next year if Congress doesn’t act.

The Standard & Poor’s 500 Index tumbled as much as 19 percent last year, within 1 percent of a bear market, after U.S. officials struggled to agree on raising the debt limit. The Chicago Board Options Exchange Volatility Index jumped 32 percent in 2011, for its biggest advance in three years.

The benchmark gauge for American equities is up 10 percent in 2012 amid central banks’ easing measures and U.S. corporate earnings exceeding analysts’ estimates. The VIX has dropped 22 percent this year. The Dow Jones Industrial Average slumped the most in a year Wednesday as investors’ focus turned to the budget debate following President Barack Obama’s re-election.

Debt Ceiling

Last year, Congress “raised the debt ceiling, which was the right thing to do, but they did a heck of a lot of damage in the meantime by scaring businesses, scaring investors, keeping them on the sidelines,” Kashkari said. “We’re expecting to see choppy markets up until the last second when a deal is ultimately struck.”

Fidelity Investments’ James Morrow said that while he hasn’t made any adjustments in his portfolio in anticipation of changes to dividend and capital gains taxes, resolving the fiscal cliff would lift investor confidence in the stock market. If Congress fails to avert the fiscal cliff, the rate on dividends for high-income taxpayers is set to rise in January to 43.4 percent from 15 percent and the top rate on capital gains to 23.8 percent from 15 percent.

More than $100 billion has been pulled from equity mutual funds this year, while bond funds lured in about $270 billion, according to data from the Investment Company Institute in Washington.

‘Positive Outcome’

“What’s more important for equities is, ‘Is there a solution around the fiscal policy and is there a positive outcome that people could feel more optimistic about?’” Morrow, a stocks fund manager at Fidelity, which oversees $1.58 trillion, said at the conference roundtable Thursday.

The stock market is pricing in no resolution to the fiscal cliff, according to Diane Jaffee, the New York-based group managing director for U.S. equities who oversees about $5.3 billion in assets at TCW Group Inc.

“We’re near-term cautious” on stocks, Jaffee said in an earlier roundtable at the conference. “We’re looking for companies with bottom-up catalysts for change, for self-help regardless of the macroeconomic environment.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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