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Nothing 'modest' or 'moderate' about market rally

August 1, 2013: 12:42 PM ET
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The S&P 500 is at its highest level ever as investors actually celebrate good economic news. Imagine that.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

It looks like investors have gotten over their silly worries about which M-word the Federal Reserve used to describe the economy.

The central bank said that growth now looked "modest" as opposed to "moderate." Stocks finished Wednesday mixed (another M-word!) as traders debated this subtle (although I would call it meaningless ... M!) change in the Fed's statement.

Related: Fed signals cautious optimism about economy

But Wall Street went back into rally mode Thursday. The S&P 500 topped the 1,700 level for the first time ever, and the Dow also hit a new all-time high.

If you're looking for a word beginning with M to describe this seemingly never-ending bull market, it's not modest or moderate. Try magnificent. Or marvelous. Or monumental. Mind-blowing, even.

Can stocks keep heading higher? Even with the Dow and S&P 500 up nearly 20% this year, several fund managers are still bullish. Here's why.

Sure, the Fed may finally start cutting back, or tapering, its bond buying program as soon as September. But it seems investors now realize that the beginning of the end of QE is not the beginning of the end of the bull market.

As long as the Fed is only considering tapering because the job market is getting better, housing prices are heading higher and the manufacturing sector is getting healthier, then what's the problem? Good macro news is good for the market.

"The most important thing is the economy," said Russell Croft, co-manager of the Croft Value Fund (CLVFX) in Baltimore. "We hate days when the economic numbers are strong and the market goes down because of concerns about the Fed. We want to see the unemployment rate going lower."

Interestingly, Thursday's rally did seem to be led by several bits of good economic news. Jobless claims are at a 5-year low. The ISM manufacturing index came in much higher than expected. And consumers are spending on cars and trucks. GM (GM), Ford (F) and Toyota (TM) all reported very strong sales gains for July.

Related: Economy pulls through federal budget cuts

Croft said that with this in mind, he is still finding stocks to buy at decent valuations. In particular, he's a fan of stocks that can benefit from the housing rebound. He owns builder Lennar (LEN) and timber companies Weyerhaeuser (WY) and Plum Creek (PCL).

Marty Leclerc, chief investment officer with Barrack Yard Advisors, an investment firm in Bryn Mawr, Pa., also thinks the market can keep ralliyng. But he's a little wary.

"Confidence has definitely returned to the markets. It's almost impossible to imagine stocks going down from here. But risks are elevated," he said.

Leclerc thinks that stocks in the U.S., while not absurdly expensive, are not as cheap as other international markets. He thinks Europe looks attractive and thinks that the worst may be over for the eurozone economy. He said one of his top stock picks is British-based Big Pharma company AstraZeneca (AZN).

Related: The stock market in Wonderland

Still, Leclerc isn't completely shying away from American stocks. He just thinks that investors need to be even more conscious of valuations than ever and should avoid stocks that may have run up too far too fast.

He likes Mosaic (MOS), the fertilizer stock that plunged earlier this week on concerns of lower potash prices. He thinks the sell-off was overdone.

Leclerc also recommends IBM (IBM), which has trailed the broader market this year despite solid revenue and earnings growth, and a steady dividend.

Mosaic trades for less than 8 times 2014 earnings estimates while Big Blue is valued at only about 10 times profit forecasts for next year.

"We're still buying stocks that have lagged. If this bull is for real, there will be a rotation to some of those out-of-favor stocks," he argued. "You always want to go to where the value is."

Croft agrees. He said that investors shouldn't necessarily chase performance. But he also points out that a lot of cash may still be on the sidelines. Even though stocks have been in rally mode since the market bottomed in March 2009, many individual investors had continued to put money into bond funds.

With the yield on the 10-year Treasury now around 2.7% -- near its 52-week high -- investors may look to sell more bonds and shift back into stocks.

"There were tons of outflows from stocks before this year. People may still be just nibbling at the market," Croft said.

So even if the bull is getting tired, he may not be ready to rest just yet. But again, it all depends on the economy.

Friday's jobs report will be a big test for the market. If more jobs are added than expected and the unemployment rate goes down, hopefully the market will celebrate ... even if it means that the Fed will be one step closer to finally unwinding QE.

Reader Comments of the Week! I love me some pop culture. Two Twitter followers win this coveted (#sarcasm) honor for paying homage to one of the most quotable TV shows and movies ever.

I tweeted earlier this week about how Tim Cook's job was now probably safe since Apple's (AAPL) stock was back over $450. But I quickly added that this was a joke. Cook probably has nothing to worry about since nobody related to The Boss (as in the late owner of the Yankees, not Bruce Springsteen) is an Apple board member.

That prompted this awesome Seinfeld reference.

Costanza's in the building!

The other RCOTW winner gets the nod for knowing his Coen brothers. After noting that IHOP-owner DineEquity (DIN) was surging on strong earnings, I asked Twitter followers earlier this week to name the movie that has this line. "We stop at pancakes house."

The answer is Fargo. But one reader did something clever. He quoted me back another line from another Coen classic ... by the same actor.

Beware of those nihilists! Is there a Peter Stormare fan club?

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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