NEW YORK -- As Wall Street types return from the Hamptons today to do battle in the nation's financial markets, they can look back over the summer and take some satisfaction that the stock market managed a modest rally.
Or at least some of them can.
That's because the summer rally took many on the Street by surprise, with several leading market strategists having predicted a "correction" (a Wall Street euphemism for a moderate crash followed by more good times) for the past few months. Stocks were overpriced, the argument went and money couldn't continue to pour into the market. Eventually, the bull would run out of steam and the bear would preside.
It hasn't yet worked out that way, though the summer rally was hardly a barn-burner. Despite hitting record highs, the rise of most market indicators was relatively modest.
The Dow Jones industrial average, for example, rose 2.3 percent between Memorial Day and the Labor Day weekend, when it closed Friday at 3,633.93. Meanwhile, Standard & Poor's broader index of 500 stocks climbed a meager 1.5 percent during that period to close Friday at 461.34. The Nasdaq stock market closed at a record 749.71, up 6.5 percent during the three-month period.
jTC According to the bulls, this rally was perfectly respectable and should continue for some time. Stocks are expensive, but low interest rates mean that certificates of deposit and bank accounts barely keep up with inflation, forcing investors into equities.
"We've had a nice rally -- nothing special, but not bad considering we're moving to record levels, that the rally is so old and that the economy is so uncertain," said Arnold Kaufman, editor of S&P;'s Outlook newsletter.
Those caveats make the next few months -- traditionally the stock market's most volatile -- the subject of intense debate among Wall Street analysts.
Pessimists continue to warn that the market's record levels are unsustainable, while optimists argue that factors unique to the current low-growth economy will buoy the market.
David P. Bennett, an analyst of the stock market's technical trends with Prudential Securities Inc., said stocks might indeed be expensive, but there is little evidence that investors are caught up in a speculative buying frenzy. Unlike other market tops, such as in 1987 and 1973, investors are fully aware that the stocks they buy are expensive, Mr. Bennett said.
"This mitigates the negatives. People are going in with cool heads," Mr. Bennett said.
One common way of measuring just how high stocks have been bid is their dividend yield -- the ratio of a stock's dividend to its price.
The dividend yield of stocks on the S&P; 500 is currently at a near-record low of 2.75 percent, meaning that shareholders who buy now are getting little dividend return for their money. The yield has only been lower twice before in market history, 1973 and 1987, just before severe crashes.
"We are acutely aware of the dividend yield. If you just look at the yield, you'd be scared out of your . . . wits," Mr. Bennett said.
With interest rates so low, however, even these near-the-floor dividend yields do not mean that investors will give up on stocks and dump them, Mr. Bennett said. Instead, the market should continue to plug away higher until some outside event disturbs it.
This sense of fragility is conveyed by most strategists, analysts and economists on Wall Street.
"Although the markets have moved to all-time highs, the trading public is deeply skeptical. But we still needs some impetus for the market to tumble," said Stephen W. Shobin, a market analyst with Lehman Brothers.
Mr. Shobin said the market could be hit by a bout of speculative bidding, especially in small stocks. This might be already happening, he said, as shown by the Nasdaq's huge gains. The Nasdaq -- primarily representing small, technology-oriented stocks -- has shot up to record highs at the same time other markets only crawled to records before retreating last week.
"The parting of the ways may already have begun," Mr. Shobin said.
David Shulman, chief portfolio strategist at Salomon Brothers Inc., said that even the low yield on government bonds, which closed at a record low 5.94 percent Friday, could be signs of future problems.
While low bond yields could push investors into stocks, they also signify that bond traders are pessimistic about the economy, Mr. Shulman said. Bond yields typically decline when the economy slows.
"What this may be saying is that the economy is weakening and that we can expect companies to release some disappointing earnings reports in the future," Mr. Shulman said.
Companies' earnings reports for the April to June period did meet Wall Street's expectations. But the consensus on Wall Street is that earnings will be disappointing for the July-to-September period, according to surveys by the Institutional Brokers Estimate System.
Bad news could stem from consumer products companies, such as Procter & Gamble Co., which throughout the 1980s had been immune to the restructuring that had hit big industrial companies, said Mr. McManus of Morgan Stanley. Last month, for example, P&G; announced plans to close 30 plants and eliminate 13,000 jobs worldwide over the next three to four years.
As companies restructure to compete in today's low-price consumer environment, their stocks could also suffer, taking away another pillar from the bull market.
Nevertheless, similar concerns have been voiced through most of the year and money continues to pour into the market, with nearly $10 billion a month entering through mutual funds.
And with inflation still low, interest rates seem unlikely to rise in the near future to provide an alternative to stocks.
"I still predict a 10 to 20 percent correction within the next three months," said Mr. Kaufman of Standard & Poor's. "But in the meantime there's no reason why the market can't continue to increase to new highs."