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Why Leading Market Strategists See the S&P 500 Hitting 1600 (Or So) in 2013

Dee Gill

An unpredictable Congress will make budget decisions over the next few weeks that will make a huge impact on the fortunes of many shareholders, and this is not a situation one would expect to inspire optimism. But it’s comforting to note that the vast majority of experts still believe in significant gains in U.S. stocks in 2013.

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By “experts” we mean strategists and economists whose past guidance has helped lead major investors to major gains. There’s Savita Subramanion, the Bank of America (BAC) strategist who forecasts the S&P 500 at 1600 by the end of 2013. That’s a 12% gain on 2012 year-end. Also Tobias Levkovich, Citigroup (NYSE:C) strategist, who targets 1615, and Oppenheimer & Co’s John Stoltzfus at 1585. Goldman Sach’s (GS) David Kostin forecasts 1575. There are at least a dozen others predicting 8%-plus gains for the year.

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The reasons behind their optimism can be shown in several charts. The first is simply the unattractiveness of bond yields, such as the 5-Year Treasury, which the Federal Reserve has made clear will remain low at least until 2015. These numbers are expected to send more bond investors into the equities markets for better returns.

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5-Year Treasury Note Yield Chart

Domestic natural gas production is booming, creating not only jobs in the industry but an abundance of cheap fuel for others. The low natural gas price now cuts costs for manufacturers that use it to make their products, like fertilizer company Potash Corp. of Saskatchewan (POT) and Dow Chemical (DOW). It’s also nice for electric power companies that are using more natural gas.

Henry Hub Natural Gas Spot Price Chart

Improvements in the housing market, too, are expected to have a positive impact on stock prices that goes well beyond homebuilding and construction sectors. Better housing prices and more existing home sales mean homeowners – aka, consumers -- are richer, or at least less anxious about their fortunes. This housing improvement is a key reason many analysts believe companies that rely on discretionary consumer spending, such as Ford (NYSE:F) and Whirlpool (WHR), are set to have much better 2013s than 2012s.

US Existing Home Sales Chart

Notably, even the most positive strategists expect a rocky performance for stocks in the first half of the year. They predict more stability after Congress comes up with a solid spending plan to go with the tax increases, and problems in China and Europe show some signs of bottoming out. But they see each of these situations improving enough in the second half of the year to boost both business and consumer confidence.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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