Wells Fargo Guy Sees 40% Rise in S&P 500: Beyond the Cliff Lie Greener Pastures?
The fiscal cliff crisis is playing havoc with the stock market, sparking big sell-offs and occasional buy-ups as investors try to follow the progress, or lack thereof, in averting it. But if you believe there will be a resolution – that Congress will agree on a budget soon, even if it misses the year-end deadline -- shouldn’t you be taking advantage of this touchiness?
Despite the hype, many of the brightest who track markets are looking at the fiscal cliff crisis as just a detour on the way to higher share prices, not an event that will permanently derail growth. Wells Fargo (WFC) Strategist Brian Jacobsen, overseer of more than $205 billion in investments, describes it as a “speed bump” and forecasts the S&P 500 at 2,000 in 2014. That’s about a 40% rise from levels of late. Other top strategists, including those from Goldman Sachs (GS), Bank of America Merrill Lynch (BAC), Oppenheimer (OPY) and ING Groep (ING), are forecasting gains in the S&P 500 of at least 10% between now and the end of 2013.
They don’t all agree on what will happen between now and budget resolution, a.k.a. the end of the fiscal cliff crisis. Goldman’s David Kostin, for example, expects a big dive in share prices during that time, but others are skeptical that the buying opportunities will be quite so pronounced. And of course there are smart people who are more worried about things long term, like the folks at UBS (UBS) who predict barely any gains in the S&P 500 next year. Still, from the list above, it’s apparent that people in control of a whole lot of money will be picking up knocked-down stocks in the near future. There’s at least a tiny element of self-fulfilling prophecy in that.
Part of the reason for optimism is simply the damage already done by the standoff. Although it’s unfair to blame any stock price weakness solely on the government, the threat of higher capital gains and dividend taxes has surely led to some pre-resolution profit taking. In the past two months, such tax evasion probably put pressure on high-performing stocks like Apple (AAPL) and lululemon athletica (LULU), as well as popular dividend payers like AT&T (T) and McDonald’s Corp. (MCD). That kind of selling probably isn’t over.
Corporations like General Electric (GE), Aetna (AET) and International Business Machines (IBM) report that the fiscal crisis hurts their companies because their customers are delaying big spending. (Supposedly until they see whether Congress enacts taxes or spending cuts that will hurt their businesses.) We won’t know if these excuses hold water until the crisis passes. But if they are to be believed, then a reasonable resolution to the fiscal cliff should bring a wave of prosperity to these companies.
But the biggest reasons for hope in 2013 and beyond lies in the steadily improving U.S. economy, as seen in important economic indicators. Unemployment is sliding, home selling and building is rising and GDP reports are expected to be revised upward. While it’s no rip-roaring recovery, the U.S. economy now looks like one of the stronger places for business in the developed world. The trends are encouraging for a wide swath of U.S. corporations, from consumer products and retail businesses to construction contractors.
Congress does have the power to blow everyone’s hopes of bluer skies ahead, and this is a risk anyone who invests ahead of a budget solution takes. A decision to simply delay revenue generating or spending cut decisions likely would be more disastrous to share prices than decisively higher taxes or specifically lower spending. Hopefully, such failure to act would be equally disastrous to the political careers of everyone involved.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.