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Despite the wave of optimism, though, a record for the stock market isn’t a sure thing. If the next few monthly jobs reports are as weak as the last few, the unemployment rate will likely rise — a discouraging sign that nearly everyone notices.
And corporate profits are expected to be down in the current quarter compared with last year, in many cases because of weak demand in recession-plagued Europe.
Europe’s stability is far from guaranteed. In the three years the debt crisis there has loomed over markets, several apparent solutions have turned out to be false starts.
Economists’ greatest single fear is the so-called fiscal cliff, a set of automatic tax increases and government spending cuts that take effect at the end of this year unless Congress acts.
President Barack Obama and many Democrats want to allow certain tax breaks to expire only for wealthier Americans. Republicans want to keep them for everybody.
Without a deal, taxes will rise, reducing people’s ability to spend and invest. A separate budget standoff could lead to massive cuts in spending on defense and social programs.
If people are paying higher taxes while the government spends less, that could sink the recovery, says Ron Florance, managing director of investment strategy for Wells Fargo Private Bank in Scottsdale, Ariz.
"If Congress doesn’t do something about the fiscal cliff, the math adds up to a recession," he says.
Meanwhile, the Fed-fueled rally could easily push indexes past all previous records — a remarkable feat considering that unemployment is above 8 percent. During the Dow’s recent cyclical peaks — August 1987, January 2000 and October 2007 — unemployment was between 4 and 6 percent.
Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J., says investors shouldn’t put too much stock in whatever the Fed is cooking up.
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The Fed has created a "false sense of security, that as bad as things get, the Fed is going to step in and make it better," Sica says. "The Federal Reserve would never expand their mandate had they not felt that the economy was very, very bad."
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