10 Reasons the S& P 500 will reach 1,600 this year

By Oliver Pursche

As fears of sequestration and a slowing economy begin to affect investor psychology, I thought it helpful to take a step back and provide some optimism and specific reasons why, after what I believe will prove to be a brief pullback, the S& P will cross into new highs and touch 1,600 before ending the year around 1,575. In a nod to David Letterman, here's my top 10 list:

1. The impact of sequestration on our economy is exaggerated. The projections ignore the additional immediate spending related to Hurricane Sandy relief. The extra $60 billion in spending will offset the first month or so of spending cuts related to sequestration.

2. Fourth quarter 2012 GDP figures are likely to be revised upward, as will estimates for first quarter 2013 GDP expectations, giving investors added confidence that our economy is growing at a mild but increasing pace.

3. There is significant pent-up demand for auto sales (great WSJ article on Thursday Feb. 21 regarding used-car demand). This is a big-ticket item and will impact GDP going into the summer months.

4. According to a recent study by the St. Louis Fed, housing inventories (the number of homes available for purchase) are below 2001 levels — ergo there is a good chance of further price appreciation and a pickup in homebuilding (risks, of course, are the so-called " shadow" inventory held by banks. However, recent legislative actions in several key states like Florida and California reduce the risk of a " massive" dump of inventory.)

5. Rising home prices and low interest rates. Who's happier than a slinky on an escalator? Homebuilders — expect a pickup in housing starts (as visible by the sharp rise in building permits) beginning this spring.

6. Increased housing starts will lead to a real rise in capital spending on consumer durables, like appliances and furniture.

7. The positive impact of sequestration will be a reprieve in the rise of gasoline prices. I do expect prices to rise again later in the spring, but the temporary drop in gas prices will also help offset the negative impact of higher payroll taxes.

8. Interest rates and inflation will remain low — in spite of current fears that the Fed will raise rates sooner than promised, don't expect a change in policy in 2013 or 2014. As this reality sets in, along with the rising GDP figures, the improved fundamentals will power U.S. equities higher.

9. " The great rotation" from bonds to equities — as some have called it — has begun. Fund flows from money markets in December and January (and most likely in February as well) into equities have steadily picked up. I believe that after a brief pullback in rates over the coming weeks, bond investors will finally lose patience and start rotating capital into equities.

10. S& P 1,600 is only about 6.5% away — not that big of a stretch with 10 months to go, especially given the recent pullback in stocks and the better than expected earnings and revenues so far.

Of course there are risks to this outlook, but investors who have been bearish have lost out on significant gains so far. I'll stick to my optimism all the while remaining somewhat defensive in my investment strategy.   

Fed's Bullard: Fed Policy to Stay 'Easy' for 'Long Time'

iStock

The Federal Reserve's " very aggressive" easy money policy is going to stay that way for a " long time," St. Louis Fed President James Bullard told CNBC on Friday.

" This is a monetary policy that packs a punch," said Bullard, who's a voting member on the  Federal Open Market Committee(FOMC).

Uncertainty about the future of the central bank's bond buying program has weighed on the stock market in recent days.

(CNBC Explains:  Fed's Bond Buying Program, Also Known as 'Quantitative Easing')

The St. Louis Fed president said in Friday's " Squawk Box" interview, " Fed policy is very easy and it's going stay easy for a long time."

On Wednesday, the FOMC released minutes of its January meeting, which said " many participants" expressed concerns about " potential costs and risks arising from further asset purchases."

(Read More:  Fed Officials Divided on Future of QE)

" I think policy is much easier than it was last year because the outright purchases are more potent tool than the 'Twist' program was … I don't think markets have fully absorbed that switch."