In March 2009, the stock market started its current bull run. At first, it was a V-shaped bounce from the 2008 Panic lows after mark-to-market accounting was changed.

Next, as the economy recovered, earnings drove stocks higher. But, between May 19, 2015 and November 3, 2016, the Dow Jones Industrials Average actually fell 2%, while other indices stagnated. A sharp drop in earnings (due to lower oil prices) and election uncertainty caused angst.



Since then, however, the Dow is up 19% and the tech-heavy NASDAQ is up 22%. Good policy ideas beget good stock market outcomes.

Last December we set our year-end 2017 stock market targets at 23,750 for the Dow and 2,700 for the S&P 500.

At the time, these targets seemed wildly bullish to many investors. Now? Not so much. We need barely more than an 11% increase in each index to hit those targets.

We weren't counting on better tax, spending and regulatory policy to reach those targets, but if that happens, our targets might be too low!

We use a Capitalized Profits Model (the government's measure of profits from the GDP reports divided by interest rates) to measure fair value for stocks. Using a current 10-year Treasury yield of about 2.3% says the S&P 500 is massively undervalued. We won't tell you the number because we think the Fed is holding interest rates artificially low.

Using a more rational 10-year yield of 3.5%, fair value for the S&P 500 is 2,700, which is our target. The model needs a 10-year yield of 3.9% to conclude the S&P 500 is already at fair value, with current profits.