During the depths of the European debt scare, US stocks got as low as 1100 on the S&P. Any thoughts of climbing back to the old highs at 1565 (established in October 2007) were nothing more than a pipe dream.
But now we are enjoying a resurgent US economy. And the European debt concerns seem relatively contained. This combination has inspired a rally to 1400, putting the dream of reaching the old highs within our grasp.
What will it take to get there?
I see 4 main factors that need to stay on track for this to happen. I will follow that up with my prediction of whether we will hit the highs this year. Read on.
4 Factors Needed to Make Old Highs
1) US Economy Stays on Track: Each quarter of 2011 saw GDP ratcheting higher. This ended with an impressive +3% showing in Q4. Yes, this is not your typical recovery. It's slow, "Muddle Through" pace has many people concerned about its strength. However, most signs point to a continuation of solid growth, including a rebound in housing construction and employment. If those areas continue to improve, then it bodes well for GDP, corporate earnings and the stock market.
2) European Mild Recession...And Nothing More: It is a given that all the austerity programs planned for Europe will tip the continent into a recession. Right now it looks like a mild one that they can shake off within a year. And with that the US economy can continue on its current course. However, if conditions get worse, or if the debt crisis restarts, then their troubles will have negative effects on our economy and stock market.
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3) China Soft Landing: No large economy can continue to grow at 10%+ a year. So we all know that Chinese growth has to cool down. The government has targeted growth at 7.5% this year as part of the soft landing process. Some fear that they can't pull it off. However, they have one of the best balance sheets of any nation with plenty of stimulus at the ready. So odds are that their economy will continue to grow at a healthy pace and our exporters will continue to benefit from their large appetite for our products.
4) Other Investment Options Remain Unattractive: Right now cash accounts are paying virtually nothing. Bond rates are near all-time lows and starting to move higher. That's not good for bond investing. The run in precious metals is likely over. And there is no boom in site for real estate prices. This makes stocks the "Belle of the Ball" when it comes to investing alternatives. That will likely keep a steady flow of demand for stocks, which leads to higher prices.
What Do I Think Will Happen?
The ride so far this year has been too smooth. And that makes me a smidge uncomfortable. I suspect that just like the last 2 years, we will have our rocky moments that pull us back down before the next bull run higher. So I don't think we will hit 1565 in 2012.
I suspect the top is more like 1500 this year. And if the 4 factors noted above stay on track, then hitting, and likely surpassing, the old highs will be in the cards for 2013.
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