CHICAGO Investors should brace for volatility over the next few months as U.S. politicians are unlikely to agree on a budget deal by year end, though that could lead to some good buying opportunities, Charles "Chuck" Schwab, founder and chairman of his namesake firm, said on Wednesday.
There is a high probability the United States will go over the "fiscal cliff" - a $600 billion mix of tax increases and spending cuts set to kick in on January 1 that threatens to derail the economic recovery - though a resolution is likely by the spring, he said at the Schwab IMPACT conference in Chicago.
"Certainly our president for the next four years has presented his position pretty clearly, I think, through the election process, and I think we have a very difficult time seeing a reasonable resolution by December 31," Schwab said.
President Barack Obama said on Wednesday in his first news conference since winning re-election last week, he was open to working with Republicans on entitlement reform and other ways to raise tax revenue as part of a broad-based deal to set the nation's finances on a sustainable course.
But he said Republicans in Congress would first have to agree to his top priority in the negotiations, of reverting to higher tax rates that were in place in the 1990s for the wealthiest 2 percent of Americans. Both Republicans and Democrats want to keep low income tax rates in place for middle-income and low-income households.
While markets will likely be volatile if a deal is not reached in a timely manner, one of the results could be some bargains in the equity and debt markets, said Schwab. He was speaking on a panel with George Roberts, co-CEO of private equity firm KKR & Co, and Scott Nuttall, head of KKR's global capital and asset management group.
Nuttall agreed there is a possibility the U.S. could go over the fiscal cliff. "We may go into a recession, but if you invest in companies you know and you think can do well over the long term, it could be a very interesting time to get quite a bit of money to work," he said.
Nuttall said that during times of crisis, corporate securities tend to sell off almost indiscriminately, leading to opportunities to buy into distressed companies.
KKR recently said it would launch two new investment funds - a high-yield credit fund and a distressed opportunities fund - through Charles Schwab Corp, one of the largest U.S. brokerages, aimed at private investors.
U.S. stocks slid on Wednesday, in part due to the potential for a drawn-out fight over the fiscal cliff.
"Investors are getting away from riskier assets, which are stocks, and they are running for fixed income, mainly Treasuries, because of all of the uncertainties that are there in the marketplace," said Roberts.
"Until we resolve the uncertainty, we are not going to have much in the way of economic growth and we are not going to have much of a rebound in the markets. We are going to be stuck in the malaise that we are in today."
One of the issues that has some investors shedding stocks, say some analysts, is the potential for higher taxes on capital gains and dividends.
But Schwab, 75, said if a deal is struck to boost taxes, the markets would adjust "in virtually one day."
"If rates go up on capital gains, people will adjust that into what the return will be and life will go on, and a person like me is going to have to write a bigger check," he said.
(Editing by Robert Birsel)