Economic conditions look no better, so what’s driving the stock rally? People appear to be moving money into the market, encouraged by Washington’s big stimulus package and various policies to shore up mortgages, debt instruments and bank balance sheets.

We’re near or at the stock market bottom, says Gus Faucher, director of macroeconomics at Moody’s Economy.com. At a conference sponsored by Dow Jones Indexes, he argued that the economic downturn is intensifying but policy actions should break the vicious cycles of unemployment, foreclosures, credit contraction and shrinking trade flows.

That’s what a number of economists are saying. Ethan Harris, a managing director Barclays Capital, forecasts an unusually lengthy recession and a feeble recovery, but suggests that the bear market is probably over.

Equities typically gain steam before the economy does. Most estimates are that the economy will start recovering late this year or in early 2010. The stock market may be nine to 12 months earlier—it has already reached its trough, by this reasoning. It may have even over-shot and gone too low.

However, reaching bottom is no guarantee of sustained gains. Mr. Harris pointed out that US profits have recorded the largest fall in 140 years. Corporate defaults are expected to continue rising. As is unemployment. Barclays has unemployment peaking at 9.5% in fourth quarter 2009; Moody’s Economy.com puts the peak at 9.8% in 2010. Housing prices have more to fall.

Here are two questions. Have stock buyers already priced in the bad news to come? And have they factored in the chance that the Obama administration’s policies will fail? If you believe traders are by and large perfectly rational, then it makes sense that it’s all baked into prices. If not, the market is in for shocks.

Chidem Kurdas maintains the blog MutualFundSmarts.com, an informative outlet for sophisticated mutual fund investors; and the blog Manhattan Capital (www.JenniferKerfuffle.com), a hilarious, libertarian news-spoof. Chidem is also a contributor to ThinkMarkets.