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By Scott Burns | 10-04-2012 10:00 AM

Is the Stock Market Priced for the Fiscal Cliff?

There is a much higher probability of at least temporarily going over the cliff than is appeared to be baked into stock prices, says BlackRock iShares global head of investment strategy Russ Koesterich.

Scott Burns: Is the stock market priced for the fiscal cliff?

Hi, there. I'm Scott Burns, Morningstar's director of fund research.

Joining me today is Russ Koesterich, who is the global investment strategist with iShares BlackRock.

Russ, today you spoke at the ETF Invest Conference, and we talked a lot about what's happening with politics and the economy. And I think the most timely, pressing thing is the fiscal cliff--it's ever there. You made the statement that, looking at the stock market today, the possibility of going off the cliff is not priced in.

Koesterich: Yes.

Burns: So, that begs two questions. What is the probability of going off the fiscal cliff, and if so, what is the impact?

Koesterich: I think the probability is, honestly, who knows?

It's going to depend very much on election, what is the outcome afterwards. It is very hard to understand or to know the minds of the politicians who ultimately are going to decide all of our fate. But I think what’s key is that, when you speak to people in Washington, the impression you're left with is that they are placing a much higher probability of at least temporarily going over the cliff than is appeared baked into stock prices. So, I think there is a disconnect.

Burns: I think a lot of people think that that's political brinksmanship, but you've been, and members of the BlackRock team, have been down to Washington, speaking with those folks. Is this political brinkmanship? The media kind of makes it out like there is this game of chicken, but is there some other game afoot?

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