(Bloomberg News) Goldman Sachs Group Inc., Wall Street's most profitable investment bank, predicts the Standard & Poor's 500 Index will rally 18% to 1,500 by the end of December and Treasuries will have a "decent" year.
"We have a very out-of-consensus view for how much the economy can grow before this growth generates higher inflation and interest rates," Jan Hatzius, the company's New York-based chief U.S. economist, wrote in a report he distributed by e-mail yesterday. "If we're right, the likely implication is a decent environment for the Treasury bond market and a very good environment for the equity market."
The S&P 500 has climbed 12% over the past year, rising to the highest level since Lehman Brothers Holdings Inc.'s bankruptcy in September 2008 as Fed Chairman Ben S. Bernanke pumps $600 billion into the economy and President Barack Obama extends tax cuts. An advance to 1,500 would result in a 19% gain for the year. The index has only risen that much twice in the past decade, gaining 23% in 2009 and 26% in 2003.
U.S. three-month bill rates will average 0.2% in 2011 and 0.3% in 2012, the report said, compared with 0.14% today. Ten-year Treasury yields will rise to 3.75% by Dec. 31 from 3.35 percent now, according to Goldman, which is one of the 18 primary dealers that are authorized to trade directly with the Federal Reserve.
The world's biggest economy will expand 3.4% this year, the report said, quickening from 2.6% in the third quarter of 2010, which are the most recent figures available.
The U.S. consumer price index will increase 1.7%, Goldman predicts, versus 1.1% that the government reported for November from a year earlier.
Low inflation helps preserve the value of a bond's fixed payments. Ten-year real rates, what investors get after accounting for costs in the economy, have doubled over the past year to 2.24%.
Today's report reiterated forecasts for the S&P 500 and 10- year yields that Goldman Sachs issued at the end of 2010 and earlier this year.