S&P 500 Index Breaks 1,400—What’s Next?

S&P 500 Index Breaks 1,400—What’s Next?To be honest, I’m surprised the stock market has been so strong; the S&P 500 Index broke 1,400 so quickly. It’s amazing to me that after a mediocre earnings season, when earnings expectations were revised lower, the stock market has been able to rise. Two reasons stand out for the breakout—a little more certainty regarding the ability of eurozone policymakers to take action to protect the euro, and genuine hope that the Federal Reserve will do more to help the U.S. economy. Trading on hope; that’s what the stock market does nowadays. (See “Equities Market Doing Fine—Just Look at the Long-term Charts.”)

I think the U.S. economy has the makings of a new, upward business cycle, but will likely experience more trouble beforehand. I’m not so much worried about a no-growth environment for the U.S. economy; I’m more troubled by sovereign debt, the U.S. budget deficit, and the U.S. debt ceiling. Going into next year, there is a lot riding on the ability of U.S. policymakers to take decisive action for the long-term good of the U.S. economy and for confidence and certainty in global financial markets. As the eurozone demonstrated, the inability of policymakers to take decisive action resulted in a major breakdown in capital markets.

U.S. corporations are in an excellent position to weather any new storm that comes their way. Balance sheets are strong, they have tons of cash, and most large-cap companies are doing well on the stock market. This is why I think large-cap, dividend paying stocks will continue to lead the stock market right into 2013. Corporate America has never been so healthy.

The S&P 500 Index will likely consolidate around 1,400 over the very near term. I would be surprised if it accelerates further. We’re now in the lull between earnings seasons and investors will be trading off the data stream from the U.S. economy and China. Investment risk in the stock market remains high because of the sovereign debt crisis in the eurozone; I feel much better about the prospects for the U.S. economy over Europe’s.

As a general investment strategy for this stock market, I want to accumulate market leading stocks when they are down—the companies that pay a good amount of dividends and have long-term track records of wealth creation. Expectations for annual earnings growth are pretty low these days, so it will be easier for corporations to surprise to the upside. Data on the U.S. economy should continue its trend of mixed results, but I believe there is now an underlying strength in its recovery. Going forward, I hate to say it, but the prospects for the stock market, commodities, and the U.S. economy lie with U.S. policymakers. There’s a lot of hope built into the S&P 500 Index at 1,400. It’s my hope that policymakers can keep the momentum going by acting decisively.