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'Wizard of Wharton': US credit downgrade will create 'chaos'

Siegel: Credit downgrade will create 'chaos'

Forget the U.S. government shutdown, markets are most concerned about raising the debt ceiling and avoiding another U.S. debt downgrade, professor Jeremy Siegel of the Wharton School at the University of Pennsylvania told CNBC on Tuesday.

"The biggest fear is another downgrade of the debt such as S&P did two years ago," he said. The longer the U.S. government shutdown wears on, the greater the fear that when the debt ceiling needs to be raised, that it will be delayed. If that happens, the Treasury won't be able to pay its bills, and it could trigger another downgrade, he explained.

(Read more: Here comes the DC shutdown: What you need to know)

"The probability is very, very low but if there is any default or begin to default on U.S. Treasury bonds, there will be chaos in the market," he warned.

Jeremy Siegel
Matt Stroshane | Bloomberg | Getty Images

"If there is any downgrade, if S&P decides to go another step and downgrade again, we remember what happened two years ago, 700 points off on the Dow, this is what we need to worry about," he added.

Standard and Poor's Ratings Services published a note on Monday saying that if the current impasse over the continuing resolution and the debt ceiling are short-lived, it does "not anticipate the impasse to lead to a change in the sovereign rating," the research reads. But S&P warns again "this sort of political brinkmanship is the dominant reason the rating is no longer 'AAA.'"

(Read more: Shutdown is nothing: Debt ceiling time bomb looms)

Once these government gridlock issues are resolved there could be a huge relief rally and "we could have could have a thousand points more on the Dow," Seigel said on CNBC's "Street Signs" Tuesday. Since last year, Siegel has called for the Dow to end 2013 between 16,000 and 17,000.

Siegel, whose comments are widely watched by investors and market analysts on Wall Street, says many of the headwinds facing the markets are behind us.

(Read more: Obama: GOP shut down government over 'ideological crusade')

"We had a diffusion of the Syria problem, that's no longer a big issue. Janet Yellen looks like a shoe-in for the Fed, that's not an issue right now. The market is digesting that," according to Siegel, who is often referred to as the "Wizard of Wharton."

He expects the fourth quarter to be good this year because so many of those uncertainties have been removed.

—By CNBC's Katy Byron. Follow her on Twitter @kbyronCNBC