Fisher: Don’t Fear The “Fiscal Rolling Plain”

Top strategist Kenneth Fisher says the “fiscal cliff” drama is far overblown, and that the overwrought fears about budget cuts and tax hikes are actually a bullish sign.

“If there’s no deal, it’s not a crisis. The fiscal cliff is fake,” Fisher says in an interview with Forbes. “A political invention, arbitrarily put at January 1 because it was politically expedient in 2010 to stick it there. Now it’s politically expedient to push it past the 2014 elections. Democrats have more to lose in 2014 than is commonly perceived now and they’ll want to compromise.”

Fisher says that the “cliff” is “really more of a fiscal rolling plain”, because its impact isn’t felt all at once. “Spending cuts are already underway and will happen piecemeal, allegedly, over the year,” he says. “The higher taxes, many of them, aren’t due until April of 2014.”

Fisher also says that even if the tax hikes and spending cuts associated with the cliff do go into effect, it won’t be a big problem for the stock market. He says that history shows there’s no clear correlation between stock returns and tax levels. “What’s clear to me from studying this is, whether you raise taxes or cut them, stocks want to rise much more than fall and will do what they were going to do anyway,” he says, noting that a myriad of factors besides tax rates in one country impact the market.

Overall, Fisher says the cliff fears are a bullish sign. “Even if tax hikes happen as feared, vast history tells me it doesn’t have to have the big bad impact folks fear,” he says. “And fear of a false factor is always bullish.”

“Cliff-Sensitive” Stocks with Upside

In his latest Nasdaq.com column, Validea CEO John Reese takes a look at stocks that might be getting hit too hard by “fiscal cliff” fears.

“What if we don’t go off the cliff, or we do, but the impact on the stock market isn’t as severe as expected. Despite what you may have heard, those are both legitimately possible scenarios,” Reese writes. “And if they do play out, the stocks that are supposed to get hit hard could instead take off.”

Reese says that if investors are willing to take on some short-term macroeconomic risk in their portfolios, they should consider fundamentally sound “Cliff-sensitive” stocks.”Keep in mind that that [fiscal cliff] risk has been known for some time, and may well be baked into prices already. If you have a long-term horizon, picks like these could provide some nice upside within a well diversified portfolio,” he says. He offers a handful of picks targeted by his Guru Strategies, each of which is based on the approach of a different investing great. Among them: defense firm General Dynamics.

Buffett on the Fiscal Cliff

Warren Buffett says that even if the U.S. goes over the “fiscal cliff”, he doesn’t think it will lead to recession. “I don’t think that’s going to happen,” Buffett tells CNNMoney. He says that even if it takes a couple months after the New Year for Congress and the President to reach a “cliff” deal, the U.S. will continue to grow. “We are not going to permanently cripple ourselves because 535 people [in Congress] can’t get along,” he says. “There are things that will disrupt the economy …. but we have a very resilient economy.”

Sonders: Don’t Sell Housing Rebound Short

Charles Schwab’s Liz Ann Sonders says that a rebounding housing market will have more of an impact than many believe it will have on the economy.

“People are still underestimating the impact that this is going to have,” Sonders said at the Schwab Impact 2012 conference, CNBC reports. “What people are underestimating is the ripple effect of confidence.”

Sonders says that “just about every metric in housing is starting to turn here,” pointing to builder confidence, home prices, and household formation, among others. “We’re finally having a surge in household formation. We have the right kind of supply and demand balance.”

With housing improving and the U.S. unable to rely on the developing world to boost growth as much as it has in the past, Sonders said it’s key that the U.S. avoid the “fiscal cliff”. And, while she says she still has some long-term concerns about the economy, she says the U.S. is faring better than other countries. “We are the cleanest shirt in a pile of dirty laundry,” she said. “It’s not stellar growth, but certainly the trajectory has improved relative to the rest of the world.”

 

El-Erian On How To Handle The Fiscal Trouble

PIMCO’s Mohamed El-Erian says policymakers trying to address the country’s fiscal problems should focus on getting businesses and individuals to put the “ton” of cash now sitting on the sidelines to use, both via investment markets and capital spending. “If you make that your objective, you’re going to move not only just on fiscal reform but on labor market reform, on credit market reform, and on housing reform, and that’s what this country needs,” El-Erian tells CNBC. He also says that he thinks tax reform should involve both increases to rates and an expansion of the tax base.

PIMCO Boss: Years of Balance Sheet “Rehabilitation” Ahead

PIMCO Chief Operating Officer Doug Hodge says that monetary easing alone isn’t enough to repair the U.S. economy, and that America is “in for a slow period of balance sheet rehabilitation” that will take years.

“What we’ve learned though is that monetary policy alone, it’s necessary but it’s not sufficient,” Hodge tells FOX Business Network. “And that’s why we’re in the third round of quantitative easing. So we’re in for a slow period of balance sheet rehabilitation, and this is going to take years. There is no simple way out, we need a couple of things. We need policy that reins in some of the spending in the deficits, that delivers consistent revenues and that promotes growth, and we are suffering on all three right now.”

Hodge also discussed the U.S. “fiscal cliff”. He says that the cuts involved with the fiscal cliff would account for about $720 billion dollars in spending, or 4.5% of gross domestic product. “No one believes that that’s what’s going to happen,” however, he says. “They’ll be some negotiated settlement, whether it’s Republicans, Democrats, we’ve done the analysis, our estimates, and I think they are basically consensus, we’re looking at about $250 billion dollars of fiscal tightening, which is about 1.5% of GDP.”

But with the economy growing at about 1.5% to 2.0%, Hodge says that would put us in “something that feels like recessionary conditions”.

What History Tells Us About Stocks & The Fiscal Cliff

Many pundits and investors have been forecasting big trouble for the stock market if the U.S. goes off the “fiscal cliff” at the end of the year, and tax rates jump on income, capital gains, and dividends. But the firm of top strategist James O’Shaughnessy says history tells another story.

Looking at data going back to 1926, O’Shaughnessy Asset Management looked at how the stock market has fared during times of varying tax levels. “Our analysis suggests that, across history, tax rates and changes to those rates generally have not meaningfully impacted equity returns,” write Travis Fairchild and Patrick O’Shaughnessy in a paper detailing the study. “Surprisingly, dividend-paying stocks performed best when taxes were highest.”

OSAM separated all years from 1926-2011 into three categories — high, middle, low — based on the average effective tax rate for a family earning $250,000. It found that in the 1/3 of years with the lowest effective tax rate, the S&P 500 gained just 3.7% annualized, and produced an average dividend yield of 3.7%. In the third of years with the highest tax rate, the index gained 11.3% annualized, with a yield of 4.5%. In the middle third of years, it gained 13.9%, and yielded 3.3%.

The group also looked at how the market performed during the 10 years when taxes increased the most from the prior year, and the 10 years when taxes decreased the most. On average, in the year after the 10 highest increases were made, stocks gained 8.4%. The average three-year annualized return was 7.9%, while the average five-year annualized return was 15.7%. Following the largest decreases, one-year returns averaged 13.0%; three-year annualized returns were 8.4%; and five-year annualized returns averaged 13.4%. “Put simply,” Fairchild and O’Shaughnessy wrote, “large tax increases or decreases have not foretold doom or boom for equity returns.”

OSAM found a similar situation with dividends. The outperformance of high-dividend stocks was basically the same, on average, during periods when dividends were taxed as regular income, periods when dividends were exempt from taxation, and periods when dividends were taxed at 15%. They found just one example of a dividend tax increase in the neighborhood of what the fiscal cliff could cause (1954-55), and found that high-dividend stocks outperformed following that increase as well.

Fairchild and O’Shaughnessy say they aren’t arguing that large tax hikes are good for stocks, or that there is a causal relationship between high taxes and strong dividend stock returns. “But it does contradict the projections of those calling for a sell off in dividend-paying stocks as the fiscal cliff nears,” they say, adding that they think valuation declines in high-dividend stocks “should be short-term and unsustainable” and would likely lead to a big buying opportunity. They say now is not a time to panic, and that what should drive stock returns in the future is the quality of companies and the price of their shares — not tax rates.

Sonders: Market to Meander; Stay Calm

Charles Schwab Chief Investment Strategist Liz Ann Sonders says the U.S. economy has a lot going for it, and thinks investors should remain calm.

“I happen to be a pretty big optimist long-term on our economy,” Sonders tells Bloomberg BusinessWeek. “I’m by no means a perma-bull, but I think there are so many things that the U.S. economy has going for it that much of the rest of the world doesn’t, including labor flexibility and incredible innovation. So I still believe in that. I still think you want to bank on that. Whether it’s 2020, or maybe even in a shorter time span, we’re going to look back at this, I think, and say, ‘Well, what do you know? We’ve pulled ourselves out of this thing again.’”

Sonders says she doesn’t think the Federal Reserve should engage in another round of quantitative easing. “The problem in our economy is not that rates are too high,” she says. Sonders also says the U.S. fiscal cliff and China’s slowdown mean the economy and markets are likely to meander. But she says the worst thing investors can do is panic or speculate, and her best advice is to “remain calm”.