You can sense almost an air of desperation from David
Kostin, Goldman Sachs chief US equity strategist, in his latest note to clients
as he pleads with them to take money out of stocks before they fall off the
fiscal cliff.

In the note, Kostin vehemently defends his year-end S&P
500 target of 1250 despite the benchmark’s recent rise to above 1400. The
strategist still sees a 12 percent drop ahead, believing that Congress will
fail to address the fiscal cliff before the election, and maybe even before the
end of the year.

“Political realities and last year’s precedent suggest the
potential that Congress fails to reach agreement in addressing the fiscal cliff
is greater than what most investors seem to believe based on our client
conversations,” said Kostin.

The so-called fiscal cliff is the expiration of payroll,
capital gains and dividend tax cuts at the end of this year. It also refers to
the mandatory sequestration of spending that resulted from the vicious debt
ceiling fight last summer.

“Last year, the deadline for Congress to raise the federal
debt ceiling  was known months in
advance,” states the report. “Nevertheless, Congress was unable to reach an
agreement that satisfied all factions. Investors were stunned and the S&P
500 plunged 11 percent in 10 trading days.”

The worst case scenario this year is that a lame duck
Congress does absolutely nothing after the election – not even kick the can
down the road by voting in a short extension of the tax breaks and spending
plans. Under that scenario, 2013 GDP would actually contract, according to
Goldman Sachs economists.

What’s more likely is an extension of some of the more
impactful and spending plans. But that is still a failure to address the issue
full-on before the end of the year and that continued uncertainty will still
hurt the economy and market significantly, according to Goldman.

“We believe the uncertainty is greater this year than it was
12 months ago,” wrote Kostin.