They say that stock markets predict economic conditions six months before the conditions impact the overall economy. What happens when markets act irrationally?

The Dow, this week exceeded 9900 for the first time since it reached its Recession era low of 6400. In just a few short months, the market has risen exponentially, much to the amazement and bewilderment, not only of economists and politicians, but of traders, investors and brokers alike.

Many economists believe a correction is due, but how deep will that correction be and when will it happen? Some predict that this earnings season will be the market breaker, while others feel that January will also see a correction or will be the time when it happens. But most concur that at some point, the market will come back to reality.

Companies have been reporting positive results, but analysis of underlying data often shows that sales and revenues were down substantially, while cost savings, plant closings and other cost benefits allowed the companies to report profits. The result of such cost savings to the companies have been high unemployment, reduced marketing results and dismal sales projections.

Some companies have reduced their advertising budgets so much that their sales will likely slump for several years to come, while others have cut production capacity so much that if the economy rebounded fully tomorrow, competitors would have easy access to capture their market share. It would be a race to see who could rebuild their production infrastructure fastest.

Others are betting their futures on expanding markets, trying to bring their products to places like South American and African nations in the hope that reductions in American consumer spending will be offset by increases internationally. This is, of course a big gamble for many companies who’ve had little time to research the impact of such tactical moves.

Meanwhile, unemployment is continuing to rise, and many Americans are falling off the radar of labor statistics, still unable to spend as before. This drives down the potential market for many companies domestically. When this happens to so great an extent that offshore sales are greater than domestic, such companies may cease to produce in the U.S. and would produce closer to their core market, further eroding the U.S. job market.

The key to this problem seems to be small business development. In the last 7 recessions, recovery came from small business, which still accounts for more than 50% of new job creation.

A shift in use of economic stimulus funds to small businesses would help matters greatly. Money is not only already appropriated, but some $15 Billion sits unused in a Treasury TARP fund designated for SBA loan backing.

The euphoria on Wall Street is clearly the desperate hope that recovery is underway, but care must be taken by market leaders. The chance that true recovery is some time away is too great to bet the farm now.