Yet in the financial markets, it’s a much happier world. An epic rally in stocks has been roaring ahead, with the Dow Jones industrial average on Friday briefly surpassing 15,000 for the first time.

Thanks to the intervention of the Federal Reserve, the bond market remains improbably strong, too. The benchmark 10-year Treasury rate fell as low as 1.612 percent last week, driving prices, which move in the opposite direction, to stratospheric levels. That helped Apple sell $17 billion of bonds at yields once reserved for the sovereign debt of only the safest governments.

In short, it’s been a giddy time to be an investor. But while the financial markets are soaring, the real economy appears to be mired in an endless slog. That discrepancy raises a troubling question: How long can financial portfolios continue to swell if wages, employment and corporate revenue remain constrained?

Unfortunately, there is no clear answer.

“The beauty of economics is that we are still arguing about the causes of the start and the end of the Great Depression,” said James W. Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis. “We’ll be debating these questions for the rest of our lives.”

Economists and market strategists have plenty of opinions, however, and Mr. Paulsen, who takes a glass-half-full perspective on the current situation, is no exception.

He says the stock market rally can continue so long as the economy keeps growing at what he prefers to call a “modest” pace, rather than a disappointing one. Despite evidence to the contrary — most crucially, stubbornly high unemployment — he maintains that the recovery is actually quite good under the circumstances. And, he said, it’s robust enough for American corporations to churn out solid profits that will bolster stock returns.

That provides no comfort for people who are out of work or earning inadequate wages, he said, but it may reassure investors and be useful for public policy.

Why? Mr. Paulsen has been arguing for years that the annual rate of economic growth is likely to remain in the low single digits because of a long-term demographic shift: the aging of the American population. The working-age population has been expanding less rapidly, at an annualized rate of 1.1 percent from 1986 to 2012, down from 1.7 percent from 1960 to 1985.

Mr. Paulsen favors liberalizing immigration rules, which would reverse this trend and spur more robust growth, he said. Until that happens, he said, “it’s possible that 4 percent annual growth is all we are going to get, and we should be happy with it.”

In the first quarter of this year, the annualized G.D.P. growth rate was only 2.5 percent, he points out, but it would have been 4 percent if the effects of government budget cuts had been excluded. Government austerity is a drag on the economy now, he said, but is likely to become less severe at some point, when a longer-term solution replaces the draconian budget sequestration.

Whatever the reason for less-than-stellar economic growth, American companies have been reaping handsome profits. And corporate America’s ability to preserve its profit margins has been a linchpin of the market rally, said David J. Kostin, the chief United States equity strategist at Goldman Sachs.

An important metric, recurring profit margin, has plateaued near 9 percent, according to his calculations, and as long as it continues at that level, it should be enough to propel the market upward. Last week was the heart of earnings season for American companies. More than 80 percent of the companies in the S. P. 500 have reported results for the first quarter and, by and large, they fared well, he said.

“The stock market is trading at fair value today, and I think it can continue to climb higher in line with earnings growth,” he said.

Goldman projects that the American economy will grow at a rate of 2 percent this year, he said. In the quarter, sales reported so far at S. P. 500 companies — which include revenue from faster-growing markets like China’s — were virtually flat, according to Thomson Reuters I/B/E/S. But profits grew 5.7 percent. “We aren’t seeing an extraordinary level of economic growth,” he said, “so companies need to take other measures to enhance profits.”

ONE thing that companies are doing is “being very careful about costs and about hiring,” he said, which helps explain the anemic labor market. And by borrowing at low rates, businesses can use the money for productive purposes or to engage in financial engineering.

They can buy back shares — thus increasing earnings per share — or increase dividends or both, which is what Apple plans to do with its borrowed billions. (Apple is keeping a cash hoard of more than $100 billion overseas, at least partly to avoid incurring a tax liability in the United States.)

Low interest rates will be with us a good while longer, Fed policy makers reiterated last week. They said they’d keep rates low as long as inflation was subdued and unemployment stayed high. In fact, they suggested that they might even add stimulus — increasing their $85 billion a month in bond purchases — if economic conditions worsen.

“For the stock market the Federal Reserve is the big wild card,” said Ed Clissold, United States market strategist at Ned Davis Research in Venice, Fla. “As long as the Fed and the other central banks keep pumping liquidity into the economy, our base case is that the cyclical bull market in stocks can continue.”

But Mr. Clissold said the lack of meaningful sales growth for S. P. 500 companies concerned him. Weak sales could presage a drop in profit margins, he said. And if profit margins decline sharply — by about 10 percent or so — history suggests that it’s time to say goodbye to the bull market. And that’s the least of it.

A sharp drop in sales and profit margins might also be an early indicator of an outright recession. That would bring untold pain to many people, not just stock investors.

For now, though, while he is scrutinizing the numbers closely, they appear to be benign.

It may not be a great economy, but the financial markets are partying on.

Article source: http://www.nytimes.com/2013/05/05/your-money/dow-touches-15000-but-the-economy-lags.html?partner=rss&emc=rss