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Jeremy Siegel, professor of Finance at the Wharton School, University of Pennsylvania, stated on CNBC yesterday, that the Dow Jones index (NYSEARCA:DIA) will hit 15,000 by the end of next year.

I can live with this. In terms of profits, Siegel believes that the fundamentals are there.

The only thing Siegel sees that is holding back investors: “I’m increasingly believing what Federal Reserve Chairman Ben Bernanke called…the fiscal cliff that’s coming at year end, with $500 billion worth of taxes and spending hits. I think that’s really keeping a lid on the market.”

In March I posted some of my thoughts on future price behavior of the stock market and I have not changed my mind since then. However, I think that the European situation also keeps retarding stock performance.

Two indicators I referred to at that time that seem to bear some relationship to the stock market performance are an index of financial market confidence and an index of financial market liquidity. In early March, both indicators were pointing toward a stronger performance of stocks. Both have weakened slightly since then…and these movements can be explained by events in Europe.

One such confidence index is published by Barron’s and is the ratio of the yield on Barron’s Best Grade bonds and the yield on Barron’s Intermediate Grade bonds. A sign of confidence in the financial market occurs when this ratio goes up because investors are not requiring as big a premium in yields between these two grades of securities as were required before. This is usually a good sign that investors are willing to commit to the financial markets.

This calculation can be duplicated using information provided on the H-15 release of the Federal Reserve where the ratio of yield on Aaa-rated bonds to the yield on Baa-rated bonds can be calculated.

In the March post I wrote “Last year this confidence index reached a near-term peak in June and declined throughout the summer and fall until February of this year. It has since risen into the middle of March. The earlier period coincided with a lot of uncertainty in the U.S. economy and with the rising concern about the European sovereign debt situation. The pick-up in confidence came about as economic information seemed to improve and as the situation in the eurozone with respect to Greece improved.”

The Confidence Index hit a near-term peak in late March as concern over the European situation rose in world financial markets. This index still remains near recent highs.

The Liquidity Index measures how yield on U.S. government debt compares with the yield on high-grade corporate debt. Here one can go to the Federal Reserve release and calculate the ratio between the yield on 10-year U.S. government issues and the yield on Aaa-rated corporate issues. The higher this ratio, that is, the closer the Aaa-rated issues are trading relative to the government bond yield the more liquid the financial markets because money is flowing almost as easily into the corporate sector as it is into the most liquid market in the world, the market for U.S. Treasury issues.

In March I wrote, “The liquidity index dropped through much of 2011 and bottomed out in December. This index has been rising since then into the middle of March. The decline occurred because so much money went into Treasury issues from other issues in the financial markets, a “move to quality.” Over the past few months we have seen a reversal in this as funds have flowed back into these other issues making the market, as a whole, more liquid.”

Well, guess what? With the recent buildup in concern over the financial situation in Europe, the “flight to quality” picked up again and vast amounts of money flowed into the U.S. Treasury market. This “flight to quality” also impacted the yield of German government debt. The movement had little impact on other financial market yields.

In the middle of March 2012, the yield on the 10-year US Treasury bond was in the 2.25% to 2.40% range. Now, the 10-year is trading in the 2.00% range.

In the middle of March 2012, the yield on the 10-year German bond was in 2.00% to 2.10% range. Currently, this bond is trading in the 1.70% to 1.80% range.

This “flight to quality” has impacted the Liquidity Index and produced a moderate drop in the relationship between government securities and high-grade corporate securities.

There is a correlation between each of these measures and the money flowing into the stock market. Right now, the Confidence Index seems to be holding its own, given the flows of funds in the financial markets, but the Liquidity Index has weakened.

Given past experience, I do not expect to see the stock market to move ahead to substantially higher levels until we see some further resolution of the financial situation in Europe. As long as the financial markets are focusing on “quality” and there is a remnant of the “flight to quality” remaining, stock market performance will remain relatively modest.

So, I am in agreement with Siegel on the future trajectory of the Dow Jones Industrial Average. I believe that the Dow Jones will reach 15,000 by the end of 2013. I believe that the economic situation can support such a rise. (See my post from March 30.)

I agree with Professor Siegel that we have a fiscal problem in the United States that must be dealt with in some manner by the end of this year and that this is a concern of investors.

However, I also believe that the European situation is impacting U.S. stock performance and this will tend to hold back the rise of stocks until the European Union reaches a more complete solution.

In general, therefore, I am looking forward to a strong movement in the stock market over the next 12 to 18 months.

Source: Dow Jones At 15,000?