By Roland Jones, NBC News
With the major indexes at levels not seen since the financial crisis, market observers are starting to ask if the three-month-plus rally in stock prices has staying power.
The Dow Jones industrial average closed Tuesday at its highest level in nearly five years ahead of an expected decision by the Federal Reserve to put in place fresh stimulus measures after its two-day meeting ends on Thursday.
With interest rates already lowered to near 0 percent levels, the Fed is expected to embark on a new round of quantitative easing -- when a central bank boosts the money supply by flooding financial institutions with capital to stimulate increased lending. The expected increase in economic activity is likely to boost corporate profits, and so stock prices are rising in anticipation.
Hugh Johnson, chief investment officer of Hugh Johnson Advisors in Albany, N.Y., is skeptical that actions by the Fed can do much more to stimulate the wavering economy. It would be more beneficial to the economy if the government were to get a grip on the nation?s growing debt crisis, he added.
Will more quantitative easing ?lead to an increase in bank lending? Will it lead to an increase in the money supply, or stronger economic activity? I doubt it,? he said. ?I don?t think the Federal Reserve can have much of an impact now.?
Byt the Fed is still likely to follow through on the quantitative easing plan, he added.
?Bernanke has telegraphed this to the markets, and he is very sensitive to not disappointing the financial markets,? Johnson said.
In an investment strategy report earlier this week, the Royal Bank of Canada said the expected stimulus from the Fed this week is providing a ?backstop? for stock prices that has ?introduced a degree of complacency into the equity market.?
RBC?s Myles Zyblock said RBC now has a ?cautious outlook toward share prices heading into year?s end,? pointing to reduced earnings estimates for companies and ?significant fiscal risks.? Market watchers have warned that the upcoming so-called ?fiscal cliff? -- ?when manditory spending cuts go into effect at the start of 2013 unless Congress approves specific budget reductions -- are weighing on investors. U.S. presidential election is also an uncertainty for investors.
Zyblock notes that the potential size of the fiscal cliff is about 3.3 percent of nominal GDP, and so ?some drag becomes likely? if lawmakers are unable to bridge their ideological differences over the issue.
?The latest reading from Intrade.com suggests that the political system is likely to remain as polarized after the election as it is today,? Zyblock added. ?And, markets have shown distaste for policy uncertainty.?
Investment advisor Hugh Johnson doesn?t expect the market to make much more headway in September and October. He said he calculates the market to be approximately 4 percent overvalued and above the average level it should rise to during the current quarter.
?The market has come a long way very fast and it?s time for some common sense,? Johnson said. ?We will probably look back at this period and say the market stalled out because of the uncertainties surrounding the political process.?
?That doesn?t mean at all that I?m bearish,? he added. ?I think the market has further to go, but it has come very far very fast and it has to catch up with itself.?
Federated Investors? Chief investment Strategist Phil Orlando said the market may be getting to the high end of its expected trading range. He said his target for the benchmark Standard & Poor?s 500-stock index in 2012 was 1,450. The index is now only 10 or so points away from that level.
Still, Orlando is continuing to invest in stocks in economically sensitive sectors, such as technology, financial services and consumer discretionary. He also sees potential gains in commodities, such as gold and oil, but is deemphasizing ?defensive? sectors of the market, he told CNBC this week.
Federated Investors Chief Equity Market Strategist Phil Orlando reveals exactly how he's putting money to work ahead of the Fed.
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