S&P Can Run to Record 2,000

For the S&P 500 to reach 2,000, it will need to rise 16% above what is already nearly record territory. The index should make it.

Most analysts believe that the Washington settlement will be short-lived as the action of the debt and federal budget move to late January. Corporate earnings have been weak for the third quarter, and some forecasts have been disappointing. The government shutdown could cost the economy a few tenths of a percent in GDP growth in the fourth quarter. The housing recovery could be interrupted by a mortgage system also locked up because of the impasse in Washington. However, each and every one of these is likely very temporary.

Access to mortgages should return very soon. A log jam built up by Federal Housing Administration (FHA) lenders will be cleared in a few weeks. There was no sign the home price recovery and demand improvement had slowed as recently as September. Actually, renewed access to home loans will cause the backlog not only to disappear, but as it does, there should be a surge in approvals due to this short-lived lack of access to money. And mortgage rates will remain near lows, particularly because the Federal Reserve likely will continue its bond-buying program because the shutdown crimped economic growth.

The Fed will be key to the ongoing recovery. GDP growth has been less than modest. Many experts would argue that low interest rates are one of the few things that have broadly aided this recovery. Most Fed governors consider unemployment far too high. Low interest rates should help improve that. Whether or not the bond-buying program is entirely effective, it will stay in place at least until the end of 2013.

Unemployment probably remains the worst sign of the damage of the recession. However, the economy continues to add between 100,000 and 200,000 jobs a month, and the jobless rate usually drops by a tenth of a percent. That means the unemployment rate will be below 7% soon, if the trend continues, it could be below 6% by the end of 2014.

Earnings have been crippled in many cases because of the EU economy, and more recently by demand in China, as International Business Machine Corp.’s (NYSE: IBM) most recently quarterly report showed. GDP in the European Union has started the most halting of recoveries, but a number of signs, which include PMI and businesses outlooks, have begun to rise again. China’s leaders say that GDP growth is once again on track to reach almost 8%. If so, anxiety about demand for imports to the People’s Republic will have been overstated.

Each and every one of these factors should improve the outlook of investors. The effectiveness of some of these factors may not appear until next year. However, if the market, as measured by the S&P 500, needs incentive to rush toward 2,000, it will shortly have several.

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