If you remember way back to July, I issued a prediction that 2013 would shape up to be a historic year for the markets, much like what we saw back in 1995. And with just over a month left in the year, we very well could get there. For the first time ever, the Dow closed above 16,000 and this year to date, the index is up about 20%.
Of course, such a strong turnout in the market has some asking the question: Have stocks gone too high? Will they, like Newton’s law, inevitably come crashing down? Right now, we’re hearing more and more folks argue that stocks are overvalued and primed for a fall. So let’s take a moment to look at this debate from all angles.
First, let’s zero in on the small- and mid-cap arena, which has been seeing a lot of action lately.
The truth of the matter is that the small cap stocks arena is a bit frothy due to the reason we’ve talked about before: exchange-traded funds (ETFs) that indiscriminately buy all of the stocks in the index they track. You also have relentless marketing from aggressive indices (like the QQQ, equally weighted ETFs and fundamental ETFs), and the inflow of money has caused a valuation bubble to form under some stocks. We’ve mentioned Tesla (TSLA) as a prime example.
The bottom line is those who own “crap” with poor sales and earnings should be afraid, and those who own frothy stocks are seeing their bubbles continue to burst as the flight to quality persists. However, if you own fundamentally superior stocks without excessive valuations-you can relax and expect to continue benefitting from persistent institutional buying pressure.