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Originally published March 3, 2012 at 8:05 PM | Page modified March 3, 2012 at 11:35 PM

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Stock market is in a better place, but we've got a long way to go

Much pain from the crash remains, from the 401(k)s of average Americans to companies that don't happen to be multinational corporations.

Special to The Seattle Times

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It took 25 years after the Great Depression for the Dow Jones industrial average to return to its pre-crash peak. It took only four years after the Great Recession for the Dow to ... hang on a minute.

Despite what one might infer from the hoopla over Dow 13,000, the iconic index has not returned to its pre-crash level, which was more than 14,000 in 2007. It's sure better than being at 6,500, perhaps a vote of confidence in the economy and surely a figure that President Obama can brandish. But Dow 13,000 does not necessarily mean happy days are here again.

And remember, these are nominal figures, not taking account of inflation or deflation.

Thus, the Dow's slow return after 1929 probably overstated the damage to many stocks because prices had collapsed under severe deflation. And today's 13,000, measured against inflation, doesn't look so impressive.

If you are just looking at index level versus index level, you would need something roughly 15,400 on the Dow to be even in real terms relative to the October 2007 high.

Still, we're in a rally. I have no idea if it will continue. My two pieces of personal-finance advice remain constant: Don't be greedy and don't be stupid.

The lessons for the larger economy are mixed. With so much central bank money pumped into the system and the large companies that survived the downturn boasting impressive balance sheets, it's natural the stock market would revive. But broader measures such as the Standard & Poor's 500 and Russell 1000 also remain below their pre-recession levels. The Nasdaq only recently passed its 2007 peak.

In addition, Wall Street continues to lag the stock markets of most developed nations, as well as those of emerging markets.

This means much pain from the crash remains, from the 401(k)s of average Americans to companies that don't happen to be multinational corporations. Small investors are still skittish, and the big dogs have many places to invest beyond the American stock market.

It may mean, if the recovery, slow as it is, continues, that these shares and nest eggs will gain. But investor sentiment is a fickle thing, especially after the Great Recession thrill ride.

The biggest element behind the rally, according to Erik Ristuben, chief investment strategist of Russell Investments, is "there's less concern over Europe killing us immediately."

Recall that in the fourth quarter, the European sovereign debt crisis became so severe that banks on the Continent stopped short-term lending to each other, fearful of what derivative skeletons lurked in another institution's closet.

It was frighteningly reminiscent of the situation that brought down Bear Stearns and caused the great American panic in the fall of 2008.

Economists were also looking at slowing U.S. growth and worrying about a double-dip recession.

Neither happened. The Federal Reserve helped coordinate aid for Europe, and then the European Central Bank finally brought out the famous bazooka, lending nearly three-quarters of a trillion dollars to fund banks' cash requirements for three years and to get toxic assets off their books.

American growth also rebounded, with gross domestic product increasing at a revised rate of 3 percent in the fourth quarter. Job creation improved somewhat.

"It's a good, solid rally," Ristuben told me.

Anyone looking for a 1980s-like bull market will be disappointed. "People have to get used to a low-return environment," Ristuben said. Returns in double digits are unlikely, but factoring in today's low inflation, "real returns are quite attractive."

The big risks are Europe, "same song, fifth verse," as Ristuben put it. The market hopes for an orderly unwinding of the Greek tragedy but fears a chaotic default.

Another trouble spot: rising oil prices. Strategists at Seattle-based Russell don't expect this upward trend to continue. But other strategists in Jerusalem and Tehran may complicate that forecast.

Even if the rally continues, we will not easily get away from the distortions that led up to the Great Recession or its wreckage.

Higher stock prices don't necessarily mean more hiring or middle-class income gains. Indeed, one thing making companies attractive to investors is higher margins, thanks in part to keeping down employment and wages.

And if the Depression generation lived the rest of its lives wary of the stock market, we would be wise to be vigilant about the next financial bubble. Is it student loans or natural-gas debt?

Based on our hard-won knowledge, it has to be somewhere, especially considering the financial system's soundness, and the rule of law where bank swindles are concerned, have hardly been restored.

Which brings up the entire concept of growth as we've come to expect it. Can the American economy return to robust growth in a new age of scarcity and competition? Can the middle class rebound without it?

And what about the Federal Reserve, the fountain of bubbles past? It used many "unconventional measures" to stave off another great depression. So what's the downside and when does it come due?

Don't be greedy and don't be stupid. Its wise national policy too, especially in such uncertain times.

You may reach Jon Talton at jtalton@seattletimes.com. On Twitter @jontalton.

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