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UBS Strategist Says Stocks to Gain as Europe Avoids ‘Worst Case’

U.S. stocks will rally as European policy makers act to prevent the Greek debt crisis, calming investors who have pushed American equities to the brink of a bear market, UBS AG said.

“Worst-case outcomes in Europe will not come to pass,” Jonathan Golub, UBS’s New York-based chief market strategist, wrote in a report today. Euro-zone governments will provide solutions to the region’s fiscal problems and “we believe that stocks are likely to rebound hard when that moment arises, making a tactical shift quite difficult,” he wrote.

Concern policy makers may be running out of tools to keep the global slowdown from worsening wiped out about $10 trillion from global equity markets in the third quarter. Benchmark measures for 37 out of 45 nations in the MSCI All-Country World Index had posted bear-market declines of 20 percent or more as of Oct. 3, according to data compiled by Bloomberg.

Stocks may rise as market volatility falls and investors gain clarity on Europe’s ability to solve its crisis, Golub said. A drop in the Chicago Board Options Exchange Volatility Index from 43 to 20 would correspond to a 10 percent gain in the Standard & Poor’s 500 Index, he wrote. When the VIX, derived from prices paid for options to protect equities from losses, has moved 5.5 percent, stocks have changed 1 percent in the opposite direction over the past three years, Golub said.

Unprecedented Swings

Golub said in December 2010 the S&P 500 would end this year at 1,325. He raised that estimate to 1,425 in February before cutting it to 1,350 last month, a 23 percent advance from yesterday’s closing level. The average estimate of 13 strategists calls for the benchmark measure to end 2011 at 1,305 as of Sept. 26. Golub said in 2010 the S&P 500 would finish the year at 1,350 before reducing that estimate to 1,150 in July 2010. The equity gauge rallied 13 percent to 1,257.64 last year.

U.S. stocks posted unprecedented swings in the last three months on concern Europe’s debt crisis will spur the second global recession in three years. The VIX averaged 30.6 during the third quarter, the highest since 2009, Bloomberg data show.

Europe has been struggling to contain a crisis that pushed yields on Greek, Italian and Spanish bonds to records in the third quarter amid concern Greece may default on its debt. Europe’s financial leaders are trying to repair Greece’s economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros ($400 billion) in credit risks.

The VIX slipped 1.4 percent to 44.83 at 11:46 a.m. New York time as the S&P 500 lost 0.8 percent to 1,090.99.

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