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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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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