Expect Dow 12,000 by Year-End

There may be a market correction this spring, but a moderate recovery at home, more robust growth in Asia and low interest rates will drive the Dow to 12,000 by year-end.
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Stocks prices have enjoyed a lot of help in recent months.

A moderate recovery -- 3% GDP growth expected this year and next -- and more robust growth in Asia are good for the profits of large U.S. multinationals.

S&P 500

companies earn about half their profits abroad, and the economic recovery is strongest in China, where U.S. companies are well-positioned.

Add a great interest rate environment.

The

Federal Reserve

is holding short rates near zero.

The Fed purchased and now holds well over one trillion dollars in

Fannie Mae

(FNM)

and other mortgage-backed securities. This helped keep long rates down until the market for loan-backed securities, devastated by the credit crisis, was rebuilt.

The Fed is ending this quantitative easing in the long debt market, but investor comfort is improving regarding the safety of government agency bonds. The market for loan-backed securities created by commercial banks appears to be re-emerging too.

Corporate bonds are finding ready buyers again, and investors are demanding lower premiums for risks on long-term company debt.

Mortgage, corporate and long Treasury rates will increase with the end of quantitative easing, but not a lot until the Federal Reserve pushes up the federal funds rate and the whole yield curve with higher short rates.

Don't look for that to happen soon.

Growth is not yet strong enough in the U.S. to pull down unemployment. For all the chatter about the Fed injecting too much liquidity and instigating inflation, consumer prices, less petroleum products, remain remarkably tame.

The Fed can focus on employment and wait until later in the year to address price stability.

It is not expected to start raising the federal funds rates before summer or perhaps not until after the November elections.

For now, short rates will stay low, the yield curve will steepen, but not a lot, and overall, the interest rate environment will remain very favorable for stocks.

Don't let the employment figures fool you. Manufacturing, especially durable goods manufacturing, is expanding. Businesses have learned how to get by with a lot less labor. Manufacturing profitability should improve strongly.

Like it or not, President Obama's new health plan is law, and that removes much uncertainty for the pharmaceutical, health device and insurance industries.

Robust innovation continues in the pharmaceutical, microelectronics, consumer device, auto, and materials industries.

For all the epitaphs written about American engineering leadership, why do

Intel

(INTC) - Get Report

,

Apple

(AAPL) - Get Report

,

GE

(GE) - Get Report

and other U.S. companies continue to lead?

When the recession began, who would have thought

Ford

(F) - Get Report

would become the poster child for American recovery?

The market value of U.S. intellectual property continues on a straight north compass, significantly raising the intrinsic values of many U.S. companies.

Residential construction is showing signs of stabilizing. Nonbank financial services are doing even better.

Investment banks may need better regulatory moorings, but American financial engineering is a value-harvesting machine.

We may get a correction this spring, but the bull market will resume.

Quite simply, Goldilocks has come to roost on Wall Street.

The Dow is headed for 12,000 by year-end.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.