Get Ready For A 20% Market Plunge?

| October 12, 2012 | 0 Comments

With the S&P 500 trading at its highest level since May 2008, you’d think Wall Street analysts and big-wig investors would be sharpening their bullish horns.

But it isn’t the case.

In fact, stock market bears are starting to roar…

For example, Goldman Sachs analyst, David Kostin, has the S&P 500 trading at 1,250 by year-end- about 13% below current levels.

And he’s not the only one predicting a big selloff…

Outspoken investor, Marc Faber, says the stock market is teetering on the edge of an abyss.  According to “Dr. Doom”, as he’s so affectionately referred to, the slightest bearish breeze will send stocks down 20% or more in coming months.

What’s going on?

Why are two highly respected investors suddenly calling for a market wipeout?

Unfortunately, it comes down to politics.  These prominent investors (and many more) are worried US politicians won’t be able to get a handle on the upcoming “fiscal cliff”.

What the heck is that?

Quite simply, it’s an economic event capable of sucker punching the market come December.  That’s right, thanks to the expiration of the Bush tax cuts, American businesses and workers are looking at a dramatic tax increase starting January 1st, 2013.

Given the fragile state of the US economy, a tax increase is the last thing Americans need right now.  But the potent mixture of higher taxes (along with sizeable spending cuts) has the potential to push the US economy over a cliff come 2013- hence the verbiage “fiscal cliff”.

According to fund manager Blackrock, this looming budget nightmare will shrink US economic growth by 5%, or around $807 billion.  Needless to say, the bullish effects of QE3 will be put to task if this issue isn’t resolved… and soon.

And that leads us to the next issue…

The only way to fix this pressing problem is for Washington politicians to come together and hammer out a new budget.

Doesn’t that fill you with confidence?

Yeah, right.

Considering the drama created by rampant political gamesmanship in the 2011 debt ceiling debate, it’s understandable why Wall Street is preparing for a correction.

And if that weren’t enough, listen to this…

Congress will be tackling this issue in a lame duck session.  These notorious sessions occur after an election, when recently ousted politicians still have their vote, but before newly elected officials start their Congressional term in 2013.

Sound like a recipe for disaster?

Yep, does to me too…

So what should you do?

First, let’s take a step back.  Long time readers know I’ve been bullish on stocks for all of 2012.  In fact, when other investors were scared out of their wits in late May, I recommended you buy stocks.  If you did so, you’re no doubt sitting on some hefty profits right about now.

But as much as I would like to say stocks as a whole are a safe short-term bet at current levels… they’re not.  There’s too much uncertainty surrounding the upcoming fiscal cliff.

Will stocks plummet 10-20% like David Kostin and Marc Faber suggest?

That remains to be seen.  However, it’s a near certainty that markets are headed for a heavy dose of volatility.

Does that mean you should sell your entire portfolio and run for the hills?

Of course not…

But you should be prepared for the possibility of a market roller-coaster ride in the very near future.

And more importantly, you should be ready to buy stocks when things seem the scariest.  As a matter of fact, both the bearish investors mentioned earlier suggest buying into a market correction created by the fiscal cliff.

Bottom line…

Get your stock shopping list ready.   Astute investors are about to get a great buying opportunity.

Until Next Time,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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