A Bit of Cheer: Dow 15,000 by Year-End

Falling interest rates and a tough consumer may push the economy back into high gear.

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Superbulls Brian Wesbury and Bob Stein over at First Trust Advisers are still upbeat despite all the market chaos of recent days:

There is little to no sign of the kinds of economic imbalances that preceded past recessions. Inventory-to-sales ratios are razor thin. And during the past four years, businesses have invested a smaller share of their profits than during any four-year period since the 1960s. As a result, there is no massive overhang of plant and equipment investment like there was after the Y2K-related surge in 2000. Corporate profit margins remain high and labor compensation remains relatively low, meaning firms are still in a position to hire and bid up wages. ...

Yes, the home building industry is a man-made disaster area, with the level of housing starts down more than 55% from the peak two years ago. But home building has been declining for so long that it now comprises too small a share of the economy to, by itself, push the economy into recession. ...

The only plausible scenario for recession is a major pullback by consumers. Here, the pessimistic worldview gets downright circular, claiming consumers will slow their spending because they will lose jobs due to consumers having slowed their spending. But incomes grew more than 3% above inflation last year, even after taking out income taxes as well as monthly obligations such as mortgages, rent, car loans/leases, property taxes, and debt service on credit cards. ...

With the economy picking up steam in 2008, our forecast is that the Dow moves up as well and our year-end 2008 forecast is 15,000, with the S&P 500 at 1625. Once recession fears prove unfounded, US equities will soar. Those who maintain their appetite for risk will be richly rewarded sooner than they think.