MARKETS EXPERT DAMODARAN: One Aspect Of The Fiscal Cliff Scares Me More Than It Scares Everyone Else

aswath damodaran

Photo: Bloomberg

NYU finance professor and valuation expert Aswath Damodaran was just on CNBC discussing the stock market.When asked to weigh in on the latest correction, Damodaran said that this one is “healthier” than those that have characterised the last four or five years because it’s related to growth fundamentals as opposed to headlines out of Europe.

However, Damodaran also said there is one thing that would not be so healthy for the market on the horizon, and it could lead to heavy selling going into the end of the year.

Damodaran told CNBC:

What scares me, though, is the fiscal cliff – not so much in terms of everything else that everyone may be talking about, but the change in tax rates for dividends and capital gains.

I, for one, am much more scared of that than most people seem to be. Maybe I’m just a worrywart, but I can’t imagine that this market can overcome the kind of adjustment in tax rates that is coming on January 1 if nothing is done.

CNBC anchor Simon Hobbs followed up, asking Damodaran to clarify:

So, what you’re saying, just to elaborate, is that because the tax rates may rise, that you will see people effectively having to sell in order to book their gains now – their capital gains now – or indeed, to move away from stocks that are paying dividends. So, you are predicting, if i’m right, much more selling towards the end of the year?

Damodaran replied:

Exactly. Unless, of course, Congress pulls out one of its last-minute tricks on December 30, and they pass an extension of the tax law. It seems like the market is building in that presumption, but given the dysfunctionality of the political system, I wouldn’t put it past them to do something incredibly dumb and let this kind of play out.

Less than two weeks to go to the presidential election – after that, this may come into focus.

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