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Is this a stock market bubble?

By Sheyna Steiner · Bankrate.com
Tuesday, November 19, 2013
Posted: 3 pm ET

Stocks have been on a tear, major indexes hit record highs on Monday and some analysts expect the bull market to continue into 2014.

At the end of the day Monday, the Standard and Poor's 500 Index closed at 1,791.53, up 2.7 percent from one month prior and up 7.44 percent over the past 6 months. During trading on Monday, the index crossed 1,800 for the first time ever. Similarly, the Dow Jones industrial average crossed its all-time high of 16,000 during trading on Monday and closed at 15,976.02.

It's not exactly a "normal" market -- many people have pointed out that the central bank's stimulus program and ultra-low interest rate policy is likely fueling the rocketing stock market in part. But is it a bubble?

At her Senate confirmation hearing last week, the prospective new Fed chair, Janet Yellen, downplayed the bubble risk, citing a lack of evidence and a limited buildup in leverage, Bloomberg reported.

Bubble or not?

"The stock market has done exceptionally well over the past several years, which by nature prompts investors to think have we come too far too fast. I think the answer is no," says Craig Fehr, CFA, an investment strategist with Edward Jones.

"When you compare market prices to earning, things don't look too out of line. Earnings look good, we're likely to hit all-time highs in terms of earnings for the S&P 500 next year. That doesn't make all-time highs in terms of stock market prices all that out of line," he says.

In fact, price-to-earnings for many businesses is in line with the historical average of 15, according to Fehr. Just like how it sounds, the price-to-earnings ratio or P/E ratio is a common metric to understand how the stock performance compares to similar businesses based on the price of the stock divided by the earnings per share.

"It's a popular comparison tool investors can use to quickly gauge how much they are paying for a company’s future earnings. For example, a P/E of $12 suggests investors are paying $12 for every $1 of future earnings," says Robert Laura, president of Synergos Fianancial Group, in Brighton, Mich.

What to do now

But stock picking isn't for everyone. Investors with money predominantly in mutual funds may do well to take a little money off the table now that the market has appreciated so much. People who have been counting on a pullback in order to put more money into the market should probably take a systematic approach.

"As investors, we want to avoid the traps of buying high," says Fehr. Rather than loading up on assets all at once, investors should buy a little bit over time in a process called dollar-cost averaging.

"You don't want to wait, you want to take action, but you don't want to pile in when volatility has been low and performance has been strong," Fehr says.

Are you feeling any wealthier with the stock market soaring?

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Follow me on Twitter: @SheynaSteiner.

***
Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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7 Comments
sjb
November 21, 2013 at 5:00 pm

Unbelievable. It's a sad day when you realize all your casino "expertise" results only in you racked up as just another 'sheeple'.

Sheyna
November 21, 2013 at 9:09 am

Hi Joseph, I think it depends on the type of mutual fund. One thing in general, I think it's useful to consider rebalancing your portfolio on a regular basis, whether you do it on a calendar schedule or after big moves in the market -- if your allocation has moved away from your original settings in a significant way then you may want to consider dialing it back a bit and selling some winners and buying losers.

Bulldog
November 21, 2013 at 9:04 am

The stock market is not a zero sum game,as suggested by The Rock, so everyones gain is not always someones loss. If I buy a stock at $50 and sell it to someone for $60 I gain. If that person holds the stock and sells it at $70 they gain as well. Of course you can lose money in the market, but when it is growing everyone can gain.

Monte, I think your math is off. There are 314 million Americans, if the Government gave each person $1,000, that would be $314 billion alone. If you give 314 million people a $1,000,000; that would be $314 trillion. More than 20 times our national debt. You need a different plan.

Joseph
November 21, 2013 at 7:46 am

What about mutual funds? Are they still the best bet. they say the stock market doesn't affect them as much, I know that's wrong. Anybody think you should slow down in investing in them?

The Rock
November 21, 2013 at 1:20 am

what good are stocks if they don't go down after they rise? A Gain is based on someone else loss. Getty ready bulls, you lose

Monte
November 21, 2013 at 12:03 am

I think that as long as the Fed is giving away $85B each quarter the stock market will be fine. The Banks, Corps. and the rich will get richer. Notice how this is not improving jobs or small business the GDP or the economy in in real way.
I'd like to see the government spend that money on small business which provides most of the jobs in this country which will give people more jobs and increase the tax base. Instead of the rich being on government QE welfare to get to get richer, we should go back to a capitalist system. Where the rich get rich by competing for the tax payer's dollars.
On another note, if the Gov. gave every person in the US $1 million dollars that would be 1/250th of the QE. And the Gov. would only have to do it once. And the Gov. could collect the taxes on the $1 million.