Tags: stock | market | powder | keg

Business Insider: Stock Market Is a Giant ‘Powder Keg’

Thursday, 20 Dec 2012 02:40 PM

By Michael Kling

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The stock market looks like a "gigantic powder keg, ready to blow," writes Sam Ro, editor of the Money Game for Business Insider.

An overly optimistic stock market seems to be dismissing the likelihood of the impending fiscal cliff that's expected to slash the gross domestic product.

"The stock market appears to have adopted a surprisingly benign view that Congress and the White House will reach agreement to avert the full impact of the fiscal contraction," says Goldman Sachs analyst David Kostin, noting that professional investors are assuming Washington will reach a deal, according to Ro.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Jonathan Golub, chief US equity strategist at UBS, speaking at a recent luncheon, said an optimistic market has already priced in a deal that averts the fiscal cliff, according to Ro. That means only downside risk remains.

If President Barack Obama and House Republicans reach a settlement, stocks will go down or not move, Golub predicts. If they don't reach a deal, stocks will drop drastically.

A UBS Investment Research survey indicates that two-thirds of investors think an agreement will be reached by the end of the year, with half predicting a deal by Christmas and half after, Golub relates. Of the one-third who don't predict a deal until next year, over half don't expect a deal before Obama's inauguration on Jan. 21.

Greg Valliere of the Potomac Research Group also believes investors are too optimistic about an agreement being reached. In a Potomac Research Group survey, two-thirds of investors said the Dow Jones Industrial Average would drop at least 10 percent if a deal is not reached by Dec. 31, according to The New York Times.

"Many people in the markets feel that it's unthinkable that Washington would do something this irresponsible," Valliere told the Times. "After following Washington for 30 years, I would argue it is not unthinkable."

Editor's Note:
This Wasn’t an Accident — Experts Testify on Financial Meltdown

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