Stocks continued their seemingly unstoppable steady climb on Monday, with the Dow Jones surpassing 16,000 for the first time and the S&P 500 Index briefly inching above a record 1,800, until both indexes retreated to close slightly below those milestones.
True, those milestones are about as meaningful as a car odometer flipping over – remarkable only in the fact that they end in multiple zeroes. But they do indicate continued strong stock performances. Since the start of the year, the Dow has gained nearly 2,900 points, or 22 percent, and the S&P has gained more than 360 points, or over 25 percent. Those gains have been fueled in part by Federal Reserve stimulus, leading to worries that an inflated asset bubble is readying for a fast deflation. However, many analysts say there's no reason to expect a bear market just yet.
"You're 4, 4 1/2 years into an economic recovery, and that's finally taking hold," says John Canally, vice president and economist at LPL Financial, pointing to a trend of relatively sustained and uninterrupted positive indicators. "Now that you're a good ways into the recovery the odds of a recession in the next couple of years are relatively low, I think it allows investors to focus more on the fundamentals."
Investors are increasingly able to focus more on an improving economy and companies' earnings reports, says Canally, rather than constant external threats, like a European debt crisis or the threat of a double dip. Other analysts agree.
"Current [price-to-earning] multiples appear to us to be consistent with improving economic conditions rather than excess optimism that could signal an asset bubble," writes Gary Thayer, chief macro strategist at Wells Fargo Advisors, in a Monday note. For that reason, Wells Fargo sees "likely" further stock market increases in 2014, though not quite as strong as 2013, he writes.
The Fed's several rounds of quantitative easing have lowered the yields on treasuries, making other investments like stocks more attractive and helping to boost those prices. The current round of quantitative easing involves $85 billion in monthly treasury and mortgage-backed-security purchases, and investors are nervously searching for any signs of when the central bank will taper. When current Fed Chairman Ben Bernanke mentioned the potential for a 2013 taper in June, the Dow tumbled 353 points.
The woman expected to next head the nation's central bank will be watched every bit as closely as her predecessor for her thoughts on this matter. For now, she believes there is no threat of a bubble.
"Stock prices have risen pretty robustly," Federal Reserve Vice Chairwoman Janet Yellen acknowledged in her Nov. 14 confirmation hearing before the Senate Banking Committee, as reported by CNN. "But I think that if you look at traditional valuation measures ... you would not see stock prices in territory that suggest bubble-like conditions."
Exactly when the Fed will taper is anyone's guess right now. In part because the shutdown created some distortion in GDP and jobs data, many experts have said they don't expect a drawdown in asset purchases until early 2014. However, a stronger-than-expected October jobs report led some to speculate that the Fed could announce a taper as early as its December meeting.
A taper will likely mean stock market volatility, says Canally, but he believes it "should be priced in" to stock prices because the Fed has been stressing for months that even during the taper, it will still be stimulating the economy – just to the tune of less than $85 billion per month.
However, he adds, it has been a long time since the stock market has experienced more than a 10-percent correction – more than two years, to be more precise. That sort of a large slide will come sooner or later, but when it does, there may be no reason to panic.
"I can't tell you when but that's going to happen and people are going to wring their hands and go, 'Oh man, is this it? Is this the big one?'" He says. "And unless that's accompanied by a sharp deterioration in the economic and earnings fundamentals, the answer to that is no, and it's probably just a good buying opportunity."