Fifth year for U.S. equity bull market in sight

By Jennifer Ablan

NEW YORK (Reuters) - U.S. stocks will extend their surprising bull run through 2007, albeit at a more moderate pace, thanks to further strength in corporate profits and an accommodating U.S. central bank, according to a Reuters poll.

Optimism for the coming year aside, money managers and strategists are not blind to the potential risks to U.S. equities posed by the housing market slowdown or by inflation, particularly if oil prices take another run at a record.

The December poll of over 30 strategists gave a median end-2007 forecast of 1,500 points for the Standard & Poor's 500 index .SPX, a gain of 6.4 percent from Friday's close of 1,409.84. That compared with 1,465 in the September poll.

"The second half of the year will be dominated with concerns about how much slowing there is in the economy, when are things going to pick back up and when is the housing market going to finally bottom," said Jeff Kleintop, chief investment strategist for PNC Wealth Management in Philadelphia.

"We might have a rough third quarter, but then I think we may come back with a fourth quarter that rallies," he added.

Next year's rise in the S&P would mark the fifth consecutive yearly rise and would follow the just under 13 percent gain this year, notwithstanding the vicious sell-off in April and May. That follows gains of 3 percent in 2005, 9 percent in 2004 and a stellar 26 percent in 2003.

The blue-chip Dow Jones industrial average .DJI -- which topped 12,000 in late October, as the September survey predicted it would do by year-end -- is forecast to gain just under 7 percent from Friday's close of 12,307.49, to end 2007 at 13,150.

HOW NOW DOW?

But stop the presses. Marc Pado, chief U.S. market strategist at Cantor Fitzgerald in San Francisco, believes the Dow will end 2007 not at 13,000 -- but 14,000. "The main catalyst is really politics," he said.

While the Democrats were victorious in the November election several weeks ago, it will be the presidential race in 2008 that drives the stock market, he said. To maintain or take back control, he says politicians will introduce stimulus packages soon, such as tax breaks, so that they will be able to point to a strong economy by 2008.

It's not just politicians that could be good for the economy and markets. Policy makers at the Fed are another major factor that could propel Dow to 14,000.

"If the Fed is going to ease rates some time in the second quarter, whether that's in response to weak housing market or a slowdown in the first quarter of economic data, once (the markets) see the stimulus, that's going to help," Pado added.

LOTS OF LIQUIDITY

Adding fuel to the solid rally in stocks is the abundance of liquidity sloshing through the world's financial system amid low levels on the Chicago Board Options Exchange Volatility Index .VIX or VIX. Wall Street's fear gauge drops when investors are less inclined to seek shelter from uncertainty.

The fear gauge, which has been flirting with multi-year lows, means that investors are actively seeking out riskier investments than they might in a more volatile period.  Continued...