Issue of the week: Can the stock market rally last?

A stock market rally this hot has to cool off sometime, said E.S. Browning in The Wall Street Journal. The Dow Jones industrial average has climbed 50 percent in the past six months, lifting it tantalizingly close to the 10,000 mark—“a sight few anticipated when the Dow hit a 12-year low” of 6,547 in March. On only five other occasions in the past 100 years have stock prices risen so far so fast, and each of those rallies fizzled out quickly. Will history repeat itself? That seems likely, considering which stocks are leading the charge, said Alexandra Zendrian in Forbes.com. “A major part of the rally is the zombie-like resurrection of previously embattled stocks such as American International Group, Citigroup, Fannie Mae, and Freddie Mac.” Those institutions are still in desperate financial shape, which investors will figure out sooner or later. With the underlying economy still struggling, “there will be no sustained rally until 2011,” when the real estate market has worked off its excess inventory and “small businesses and consumers have access to capital.”

But propped-up, bailed-out financial firms aren’t the only companies whose stocks have been surging, said Jeff Cox in CNBC.com. Shares of industrial corporations such as General Electric, United Technologies, and PPG Industries also have posted sparkling gains recently, for fundamentally sound reasons. Industrial production has shown “vast improvement,” with output rising a brisk 0.8 percent in August. Prices for the goods that industrial firms produce are rising as well. What’s more, despite seeing their sales fall during the recession, many well-managed companies have trimmed their expenses enough to offset the revenue decline. Now they’re poised to reap the benefits—and lay a solid foundation for a lasting market rally.

Investors certainly seem to believe that, said James Grant in The Wall Street Journal. Stock prices have jumped because investors suspect “the recovery will be a bit of a barn burner.” It’s an ironclad law of economics that “the deeper the slump, the zippier the recovery,” and there’s no doubt that the Great Recession of 2008 and 2009 was “a slump out of central casting.” Gross domestic product fell 3.9 percent from its peak, compared with GDP declines of only 1.4 percent and 0.3 percent in the two “meek and mild” recessions that preceded it. The recovery should therefore be commensurately stronger. I’m not predicting that economic growth will exceed 17 percent, as it did during FDR’s first full year in office. But “growth is likely to surprise by its strength, not weakness.”

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Still, there’s plenty to worry about, said Will Swarts in Smartmoney.com. “Bearish types” argue that “a plethora of government stimulus programs” have led unwary investors to mistake “a federal spending bubble” for genuine economic growth. They also suspect that investors are buying many stocks simply because their prices are rising, not because business is actually improving. Still, most investment experts say it’s probably a good time to buy, though their optimism is clearly of the cautious variety. “The absence of any real selling pressure, lack of unbridled euphoria, and a healthy degree of skepticism,” said strategist Richard Ross of Auerbach Grayson, “is the signature of a market which wants to move higher.”