What Might Happen If Congress Actually Resolved 'Fiscal Cliff'
CNBC.com Senior Writer
Lloyd Blankfein is not alone: Others on Wall Street share his belief that if Washington resolves the fiscal cliff issues, it could be a major market boost.
Most of the conversation regarding the "fiscal cliff" — Fed Chairman Ben Bernanke's term for what happens if Washington fails to address deficit reduction by year's end — has focused on the downside.
If the cliff isn't avoided and a series of tax increases and spending cuts kicks in automatically in 2013, that will mean disaster for the economy and the stock market , the thinking goes.
But little attention gets paid to the upside.
Should Washington defy the odds and come up with a solution, which likely would include at least a partial extension of the Bush tax cuts, a patch on the Alternative Minimum Tax and extended unemployment benefits, the market could have a chance to build on the 2012 rally.
"What if we came up with a situation tomorrow and there was some reconciliation, some agreement?" Goldman Sachs CEO Blankfein said in a CNBC interview . "I'd be a buyer of the stock market."
During the same interview, former Wyoming Sen. Alan Simpson, author of the Simpson-Bowles debt reduction plan, said Americans are deluding themselves into thinking that "no Congress could be this stupid" when, in fact, "by God they can."
Still, some strategists are beginning to talk about post-cliff market positioning.
Bank of America Merrill Lynch goes as far as to call for the "Great Rotation" — a move out of bonds and into stocks that will be triggered in part by resolution of the fiscal cliff at some point in 2013.
The move also would depend on the easing of concerns about Chinese growth and no further blowups in the European debt crisis — two more highly uncertain outcomes that BofA nonetheless thinks are achievable.
"The era of bond outperformance has ended, " Michael Hartnett, BoA's chief investment strategist, said in a note. "If the US successfully navigates the fiscal cliff, Europe continues to stabilize and Chinese growth reaccelerates, in our view 2013 could mark the start of the Great Rotation."
Hartnett puts no specific target on how high he thinks the market could rise; the firm has a 1, 450 projection for the Standard & Poor's 500 by year's end, which looks reachable. With the fiscal cliff theme, though, he recommends U.S. bank and housing stocks and bank bonds, as well as European bank bonds.
"The turns in US housing activity indicators are very encouraging, such as the homebuilding stocks and US bank stocks in particular. Both signal markets are quietly beginning to discount the revival in 2013 of the two missing ingredients of a strong US recovery: credit and jobs, " he said. "If bond yields begin to rise alongside homebuilder and bank stocks, a major asset allocation shift would be warranted, in our view."
To be sure, the BofA scenario is a lot to ask from the moribund global economy.
Fund manager BlackRock warned Friday that most investors actually aren't prepared for the cliff's ominous implications. The firm said that if a solution is not devised, it may be time for investors to head for the exits and turn to emerging markets instead.
John Stoltzfus, the normally bullish chief market strategist at Oppenheimer, said he, too, doesn't expect more than a modest rally from a fiscal cliff resolution primarily because a solution likely will be only temporary.
"I'd have to think if we saw a rally from where we are, we'd probably rise 3 to 4 percent, I don't think much more, " he said. "The market's going to say it wants to really see some action, and there will be no solution related to the fiscal cliff other than there will be some kind of outline and the beginning of a process."
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