By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Is the U.S. stock market rally for real? Or have stock prices gotten a little ahead of themselves?
After more than eight weeks in rally mode, it certainly appears that stock prices are outpacing economic reality. In fact, some stock market mavens are even starting to bandy about the “E” word - exuberance - and say it’s time to adopt a highly defensive position, or to even take some money off the table.
“Awhile back, I said that fair value on the Dow Jones Industrial Average was 7,800 - and that was if the economy was operating efficiently,” said Money Morning Contributing Editor Martin Hutchinson, a former international investment banker who now operates the Permanent Wealth Investor trading service - and who was recently cited by Slate magazine for having called the stock-market bottom. “But the economy isn’t operating efficiently. We’re rolling up huge deficits, and are rolling out huge stimulus packages. Those will both be highly inflationary. I’d say that - right now - fair value on the Dow was about 6,500 to 7,000, though it could easily bottom out at around 5,500.”
The closely watched Dow zoomed 214 points, or 2.6%, on Monday to close at 8,426, although it dropped modest 16.09 points to close at 8,410.65 yesterday (Tuesday).
U.S. stock prices have been on a two-month roll. On Monday, the Standard & Poor’s 500 Index 
gained 29 points, or 3.4%, to close at 907, a four-month high. That broad index, used by investing professionals to benchmark the market, opened the year at 903.25. It closed yesterday at 903.8, meaning it’s actually in positive territory for the year.
The tech-heavy Nasdaq Composite Index jumped 44 points, or 2.6% Monday, to close at 1,763. Even with yesterday’s 0.54% decline, the Nasdaq is up 11.0% for the year.
It’s not just the fact that the market has bounced back that has Hutchinson and some other investors concerned - it’s the forcefulness with which stock prices have escalated. After closing at a 12-year low on March 9, the S&P 500 index has rallied about 34%.
Investors have become increasingly optimistic that the U.S. government finally has a handle on the credit crunch and the financial crisis that’s grown out of that nightmare of bad debt and parsimonious lending. There’s a belief that the U.S. housing crisis has reached bottom. Even Money Morning’s Hutchinson says that the rate of decline in the U.S. economy has almost certainly slowed substantially, meaning a bottom may not be far away.
But a bottoming out in the economy doesn’t necessarily mean the U.S. economy’s many problems are at an end, Hutchinson says. With all the stimulus money flowing through the economy, inflation is certain to be a problem, meaning interest rates have to increase, Hutchinson says.
For instance, during the 1990s, inflation averaged 2.9% and the 10-year Treasury bond averaged 6.67%.
