Best stock market since '90s. Is it a 'bubble'?

S&P enjoys biggest rise since 1997; Dow has best year since '95. Talk of a bubble is premature, many analysts say, but don't be surprised by a correction for 2014.

Seth Wenig/AP
A trader wears glasses celebrating the new year while working on the floor at the New York Stock Exchange in New York, Tuesday, Dec. 31, 2013. The Dow and the S&P indexes had their best year in more than 15 years.

While much of the US economy has been making slow and steady gains over the past few years, there has been nothing slow about the stock market in 2013. The S&P 500 index rose 29.6 percent in 2013 (31.9 percent with dividends) – its best year since 1997. The Dow Jones Industrial Average kept hitting record highs, topping 16000 for the first time in mid-November and closing out the year with a 26.5 percent gain. That was its best year since 1995.

The tech-heavy Nasdaq did even better, with a 38.3 percent gain, although it has not yet entered the record territory of the dot-com years. Thanks largely to rebounding stock prices, US households have regained nearly all the wealth they lost during the Great Recession.

That acceleration has some experts whispering "bubble." Most recently, Nobel Prize-winning economist Robert Shiller told Reuters that the rapid growth combined with a still-fragile economy may be cause for concern.

Are we on the brink of another stock market disaster? Even the most bearish economists say bubble talk is premature. "The only evidence that I see that conforms to the notion of a bubble is you're starting to see investors move assets into the market and out of [more secure] bond funds, probably because they think they've missed something," says David Joy, chief market strategist for financial planning firm Ameriprise Financial. "Other than that there isn't a lot of evidence.... Valuations are elevated, but if you compare them to historical averages they aren't excessive."

Mr. Joy and others do see a pullback in 2014, though.

"I expect a correction in the first quarter but not one that would derail the bull market – about 10 percent or so," Joy says. He sees it as a "healthy pause" in a continuing bull market.

In an e-mailed press release, investment manager Elaine Garzarelli agrees. She predicts a 4 to 7 percent correction in the first part of 2014. In addition to easing investor sentiment, improvement in other areas of the economy, particularly the job market, could lead to the US Federal Reserve scaling back some of its monetary stimulus efforts.

Just the suggestion of any change in Fed policy can swing markets. When the Fed announced Dec. 18 that it would reduce its efforts at economic stimulus, the stock market soared, with the Dow gaining nearly 300 points.

Overall, Joy argues that the underlying factors of the market's growth are healthy, and he expects a modestly positive 2014, in line with most economists' forecasts.

But he has some advice for investors: Check the risk allocation in your portfolio.

"With the run-up in prices, a lot of people's portfolios could be disproportionately heavy in stocks [which are riskier investments than bonds]," he says. "Take a look and rebalance if you don't like your risk exposure."

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.