From 700 to 1,200. That’s the stunning move made by the S&P 500 in just 20 months.

No one’s expecting that index to tack on another +70% in the next 20 months, but more than a few market watchers are calling for moderate +10% to +15% gains next year. For that to happen, the economy must prove to be on a path to health, with 2011 GDP growth rates exceeding what we’re getting in 2010. Indeed third-quarter GDP has just been upwardly revised from +2.0% to +2.5%. But a just-released forecast from the National Association for Business Economics should give pause.

The survey of economists anticipates GDP growth of +2.6% in 2011, down from +2.7% in 2010. And that just won’t cut it. So many components of the economic picture are reliant on more robust growth to finally become healthy again. Let’s look at what the difference would be between +2.0% to +2.5% growth and +3.5% to +4.0% growth in various parts of the economy. Based on the picture painted from these outcomes, you’ll want to adjust your portfolio accordingly.

Employment and consumer spending. Economic growth below +3% is likely enough to keep the economy moving enough to avoid the need for any further layoffs. But it is also insufficient to get things moving, either. On the other hand, if GDP growth were closer to +3.5%, you could expect to see the beginning of a jobs boom as we saw in the mid-1990s as companies gain greater confidence in the 2012 and 2013 economic outlooks. And any material upturn in employment — where the economy is creating more than 200,000 jobs a month — would be a clear panacea for consumer spending.

Retailers and housing. If the NABE survey bears out and we see growth of around +2.6% in 2011, then brace yourself for another subpar year for retail and housing stocks. Housing in particular looks to be troubled for yet longer until and unless we get a really robust economic upturn, as there are simply too many empty houses creating a drag on the sector. Looking on the bright side, retailers are already geared for a tough environment, and would become hugely profitable if the economy were on a higher plane, as I noted in this article.

Federal, state and local budget deficits. Politicians are loathe to raise tax rates, but all would welcome an increase in tax receipts that come from a more robust economy. Rising tax receipts helped us generate budget surpluses in the late 1990s after years of budget deficits. And the difference is hard to overstate: +2.5% GDP growth would leave many industries marginally profitable. Yet if you tack on another percentage point to GDP growth rates, then profit margins would quickly fatten, and so would the taxes that many firms pay. Without a material upturn in tax receipts, it’s hard to see how Washington can finally chip away at the federal deficit, and it’s also hard to see how state and local governments can avoid draconian measures to avoid default. [Go here for a quick look at the relative fiscal health of state and local governments.]

Trade and the dollar. Weak economic growth brings a small silver lining. Our level of imports would be restrained as demand and spending remains weak. And the weak economy could push the dollar yet lower, which would be a boon for our exporters. This is the long-term thesis of some economists. They believe that the United States has to endure an extended period of subpar economic growth relative to the rest of the world to get our trade deficit back into balance.

Watching the calendar
That’s why the next two months are crucial for investors. You’ll want to closely monitor the economic data as it is released for any signs that whether we’re exiting 2010 on a robust note or a tepid note. By late winter, we’ll have a clearer sense of how the 2011 economic picture will play out.

Here are key upcoming economic dates to watch…

The week after Thanksgiving will bring several important economic items, including the Case-Shiller Housing Price Index, the Chicago Purchasing Managers Index and the latest read on consumer confidence (all on Tuesday).

On the first Friday of December, we’ll get the latest look at employment trends. Economists expect the unemployment rate to remain unchanged at 9.6%, and looking out during the next six months, forecasts.org anticipates the unemployment rate to fall to 9.1% by next June. If that happens, the markets are likely to react mildly positively, as it would set the stage for an anticipation of further employment gains into the future, possibly pushing unemployment below 8% sometime in 2012.

The following Friday, December 10th, is also an important day for economy watchers. That’s when we’ll get the latest looks at trends in international trade, import and export prices, consumer sentiment and the current state of the federal budget deficit.

Action to Take –> It’s a strange time. There are ample reasons for bullishness and bearishness, and with the economy right on the line between tepid growth and improving growth, investors need to stay sharply attuned to the economic tea leaves. The +70% gain from the March 2009 nadir is partially attributable to expectations that the economy will get better and better with each passing quarter. And right now, that’s not sure thing. In this kind of market, it’s wise to take profits when you can on any short-term movers while sitting tight on your long-term core holdings.