During this year's edition of the European debt scare, US stocks got as low as 1266 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.
Now we see that the European debt concerns are relatively contained. And the US economy keeps chugging along. This combination has inspired a rally to the post Great Recession highs, putting the dream of reaching the all-time highs back 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 about "if and when?" we will hit those highs. Read on.
4 Factors Needed to Make Old Highs
1) US Economy Stays on Track: I never bought into the premise that we would see GDP growth north of 3% after the Great Recession. I saw greater merit in the case for "Muddle Through" economic growth more in the +1-2% range. And for the last three years, that is exactly what was on tap which was good enough to generate earnings growth and higher share prices. Most signs point to a continuation of this growth and possible acceleration if housing, construction and employment keep on the upswing.
What about the Fiscal Cliff you ask? Politicians will always do whatever is necessary to get re-elected. And so the Cliff will most likely be trimmed to nothing more than a speed bump allowing the Muddle Through economy to stay on track.
2) European Mild Recession…And Nothing More: The continent has already tipped into recession. However, their politicians, just like ours, will find a way to spark some growth to get re-elected. Right now it looks like the European recession will be 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 their debt crisis devolves further, then their troubles will have negative effects on our economy and stock market.
3) China Soft Landing: No large economy can continue to grow at 10%+ a year. So we all know that the Chinese economy 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 potential at the ready. Plus they have an important leadership transition later this year which they want to go smoothly. So odds are that they will do everything within their power to keep growing at a healthy pace and thus not be a serious detriment to our economy and stock market.
4) Other Investment Options Remain Unattractive: Right now cash accounts are paying virtually nothing. Bond rates are at all-time lows which is not good for bond investing. The long term run in precious metals is likely over. And there is no serious boom in sight 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?
There are still too many concerns on investors' minds to race up to 1565 right now. They need more proof that all 4 of the factors above stay on a positive track. In particular, the status of the Fiscal Cliff needs to be resolved, because any real whiff of that coming fully on board spells recession and rapidly declining stock prices.
Assuming my theory is correct that these fears are overblown, then 1500 is a good possibility in 2012. This sets the paces for an assault on 1565 early next year.