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Talk of a market bubble is the real bubble

January 7, 2014: 12:58 PM ET
Repeat after me. There is no stock market bubble. There is no stock market bubble. There is no ...

Repeat after me. There is no stock market bubble. There is no stock market bubble. There is no ...

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.

Bitcoin may be a bubble. Twitter (TWTR) may be a bubble. Talking incessantly about how cold it is ("It's frickin freezing in here Mr. Bigglesworth!") may be a bubble.

But the broader stock market? That is not a bubble.

Related: The 2013 Nasdaq was nothing like 2000

Yes, stocks surged in 2013. The Dow and S&P 500 finished at all-time highs. The Nasdaq is at levels it last reached during the 2000 dot-com insanity. But it's overly simplistic to trot out the B word every time stocks are in record territory.

For one, last year's surge was an orderly bull run. Don't believe me? Look at the chart below. The Dow and S&P 500 pretty much consistently ground their way higher with the occasional hiccup along the way. It was not a volatile year with big jumps concentrated on a handful of days.

And something should only be labeled a bubble if there is no good reason for the run-up in price. That's not the case with the overall stock market.

Valuations are still very reasonable, if not necessarily thrifty. The S&P 500 is trading at 15 times 2014 earnings estimates, according to FactSet Research. This isn't 2000, when the S&P 500 was trading around 30 times earnings estimates.

And earnings are expected to increase 10% this year. If you believe (as you should) that stocks follow earnings, then the market should have no problem eking out more gains in 2014 as long as profits continue to increase.

Related: How much should you hold in stocks?

With that in mind, PNC chief investment strategist Bill Stone has declared that there is a bubble ... in bubbles. I'm inclined to agree.

Stone makes a great case for why the market is nothing like 2000 or even 2007 (the last time the Dow and S&P 500 were at record highs) for that matter.

Stone notes that the S&P 500 is currently up about 15% from its 2007 peak. But earnings in 2013 are expected to wind up being around 16% higher than 2007. So it makes sense that stocks are now where they are.

Related: 5 reasons why stocks will go up in 2014

Of course, the big question is where stocks go from here. Most strategists surveyed by CNNMoney believe that the market will continue to climb, but that the gains will be more muted than in 2013. Experts that I spoke to last month pretty much felt the same way.

Stocks were in rally mode Tuesday for the first time this year. And I realize how absurd that sounds given that 2014 is all of seven days old ... and just four days for traders.

But the sluggish start to the year until today is actually an encouraging sign. The fact that investors took a breather instead of blindly continuing to buy stocks could be yet another indication that the market is not a bubble.

You know it's a bubble when stocks go up a lot on no news. That's why I've been referring to the run-up in Twitter as a bubble. Just look at this chart!

Even when you include the big pullback of the past two days, shares are still up nearly 150% from their offering price in just two months. And the company has not even reported its first full quarter of financial results!

There's little reason to get either too excited or disappointed about the market right now considering that we're in a bit of a financial news vacuum. The jobs report is Friday. That's something that could move stocks.

Over the next few weeks, major companies will start reporting their earnings for the fourth quarter and give guidance about the first quarter -- and perhaps of all of 2014. That too will be a legitimate reason to buy or sell stocks with some sort of conviction.

Now I will admit to being a little worried that the market is ignoring the sage words of Chuck D and the rest of Public Enemy. There is a fair amount of hype investors should be wary of surrounding earnings expectations for a select group of overvalued stocks like Twitter.

But overall, the market still looks fairly attractive. There are no storm clouds on the horizon that should justifiably lead to a huge, prolonged pullback.

Related: Here comes the end of QE

As cliche as it sounds, any dip should probably get bought. In fact, people on Twitter often joke about this market rally with the acronym of BTFD. B stands for Buy. T is the and D is Dip.

I'll leave it to your imagination as to what the F stands for. But here's a hint. The word appears a lot in Martin Scorsese's "The Wolf of Wall Street." And Martin Scorsese's "Goodfellas." And Martin Scorsese's "Casino." I believe he showed some restraint in the kiddie film "Hugo."

Anyway. This market is not so ridiculously frothy that new Fed chair Janet Yellen will be tempted to pull a page from the Alan Greenspan playbook and call it irrationally exuberant.

So here's my fashionably late New Year's resolution. I may continue to point out certain stocks in Buzz columns from time to time that look like they are overvalued. But I'm not going to use the bubble word anymore. Neither should you. This bull isn't dead yet.

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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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