GOLDMAN: The Stock Market Won’t Be Fooled When Washington Cries Wolf

By admin on January 12, 2013

david kostin

Surely, the escalating drama surrounding the debt ceiling and the sequestration will lead to panic and cause the stock market to plummet. Right?

Wrong, says Goldman Sachs’ David Kostin.

“A key investment lesson of the last five years is that politicians eventually reach a compromise although markets may suffer in the interim,” wrote Kostin in a note to clients this week. “Investors have become accustomed to midnight negotiations in order to avoid one dire fate after another. Accordingly, downside may be limited this time.”

Washington scared us with their fiscal “brinksmanship” twice in the last two years. First, there was the debt ceiling crisis of 2011. And just recently, there was the fiscal cliff crisis of 2012.

The cliff had less of a negative impact on stocks than the first debt ceiling crisis.

And Kostin, who expects the S&P 500 to end 2013 at 1,575, thinks the this next “crisis” will have an even lesser effect.

Here’s more of his commentary:

The US political process is cumbersome, infuriating to observe, and impossible to forecast. Stocks discount expected future events but Capitol Hill outcomes are always uncertain. However, like Aesop’s Fable of the boy who cried wolf, financial markets are becoming inured to the recurring midnight deals that eventually are negotiated to avoid one dire fate after another. Uncertainty will remain high as the spending and debt ceiling negotiations intensify. But at some point, just like in late December, the market will perceive a potential compromise in the works and stocks should rally. But that event is more likely to occur in March than in January.

brinksmanship