The credit crunch is history, as far as Wall Street's concerned. But it's early yet to close the books on this summer's debt-market disturbance.

The Dow Jones Industrial Average soared 191 points Monday to close at 14,088, breezing by its July 19 high-water mark of 14,000. Citigroup ( C) led the Dow, rising 2% even after the bank said third-quarter earnings would be hit by more than $3 billion in charges tied to this summer's debt market mess.

Monday's record-setting rally shows investors are eager to write off this summer's credit crunch as a one-time event with few implications for the future. Citi chief Charles Prince said so himself in Monday's earnings release. Despite a huge third-quarter earnings shortfall, Prince noted the New York bank expects "to return to a normal earnings environment in the fourth quarter."

Prince isn't the only bull on that count. Execs at Lehman Brothers ( LEH) and Goldman Sachs ( GS) said last month they expect that they've seen the worst of the crisis that laid low the markets for mortgage securities, leveraged-buyout loans and other riskier debt. As a result many observers appear ready to sound the all-clear for financial stocks, which have swooned since the subprime mess surfaced this past spring.

"The bad news is in at a lot of these financials," says Todd Leone, trader at Cowen & Co.

But others say there's more pain to come in the financial sector. These observers say the bullish take on the banks and brokerages underestimates the economic impact of the summer's unrest. They caution that it's impossible to say right now how much pain the credit squeeze could end up causing, regardless of Prince's return-to-normal comment.

"I don't see how that can be true," says Richard Bove, an analyst at Punk Ziegel who has a market perform rating on Citi. "They can't make an accurate assessment ... because they don't know where liquidity is going or the economy. It's just their best guess."

The recession question aside, Bove believes that the banks will be dealing with the impact of this credit crunch for at least the next two years. And while it's true that conditions in the debt markets have improved recently, a look at the prevailing winds there show why a word of caution is wise.

Investors say the underwriters on recently placed LBO debt for First Data and Biomet are eager to do what they can to support prices in the high-yield bond and leveraged loan markets. Underwriters offered investors cheap leverage to buy the deals, say loan market participants.

Likewise, with hundreds of billions worth of debt still to sell, the brokers are loath to paint a picture of a declining economy. The firms have to do everything they can to keep the junk credit markets from falling further. If the economy slowed or default rates ticked up, they'd be selling their pipeline at even lower prices, and re-doing their mark-to-market assumptions all over again. Citigroup says its writedown on LBO commitments includes deals scheduled to be funded through 2008.

Beyond the balance sheet, investors in these companies must contend with bigger questins. Bove notes that with the collapse of the market for so-called structured finance deals -- collateralized debt obligations and the like -- the firms will lose what has been a source of strong profit growth. He believes it is doubtful brokers will lend to hedge funds at the heated clip they have been. And the firms' private equity business will be considerably dampened as deals dry up.

So even as Wall Street applauds another red letter day, some people are urging investors not to get caught up in the celebration.

"From a trader's perspective, when you're dealing with companies facing big balance sheet issues, you're trying to judge how bad shape the company's in and if it's playing for time," says David Merkel, an investment consultant and contributor at RealMoney.com, TheStreet.com's investment-ideas site. "If things are bad, you the company write down a little, make it look like you put down a lot and play for time. If things are good, you mop up and move on."
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.