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 index has risen more than 10 percent since June 4, closing Wednesday 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 short-term interest rates already lowered to near zero percent, the Federal Reserve is expected to announce a new round of quantitative easing Thursday -- a plan to inject more capital into the market 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.?
But 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 a report this week, the Royal Bank of Canada said the expected stimulus from the Fed is providing a ?backstop? for stock prices that has ?introduced a degree of complacency into the equity market.?
?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," said the bank's Myles Zyblock.
Market watchers have warned that the upcoming ?fiscal cliff? at the start of 2013 -- ?when mandatory spending cuts and automatic tax increases are scheduled to go into effect -- are weighing on investors. The 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 and reach a solution.
?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.?
Johnson doesn?t expect the market to make much more headway in September and October. He calculates the market to be approximately 4 percent overvalued.
?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 about 10 points from that level.
Still, Orlando is continuing to invest in stocks in economically sensitive sectors, such as technology, financial services and consumer discretionary goods. He also sees potential gains in commodities, such as gold and oil, but is deemphasizing defensive sectors, he?told CNBC.
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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