The S&P 500 is having its best year since 2003 with gains of over 26 percent year to date. Small cap stocks are soaring even further — up some 30 percent and the Dow Jones Industrial Average has been hitting record highs — up over 20 percent as well. All these widespread gains have sparked a raft of bubble talk and scepticism. Barron’s even had a picture of a bubble on its front cover last weekend. Ironically this is nothing new, some of the high profile bears have been betting against stocks for years now, to their detriment. But it does feel like the doubters are coming out of the woodwork more and more. I wouldn’t, however, confuse this fear-mongering with a big sentiment shift in stocks.

Let’s take a look at some of the concerning macro elements that are being discussed:

1. Everything has been refinanced — even the bad stuff. The corporate junk bond market is bouncing along at multi-decade low yields. Most refinancing and issues have five-year terms so if rates rise over time a lot of these newly minted and often “covenant lite” issues are not likely to be refinanced so easily in the next few years. This could cause another credit squeeze within the sub investment grade market in the future as weaker companies surviving on cheap capital finally get put under ground.

2. IPO’s are “popular” again. This has been the strongest IPO market since 2007. Stocks like Twitter, Noodles & Co and Potbelly have launched very successful IPO’s at extremely rich and possibly insane valuations.

3. Social Media Mania! Many social media stocks like Twitter, Workday, LinkedIn and Facebook look a tad overextended with some valuation aspects that defy gravity. Twitter, for example, is not expected to book a profit until 2015 or 2016 and trades at about 40 times this profit some four years out. In fact you can’t even use multiples to assess Twitter because at this stage every one, except sales, is negative! It gets worse. Investors seem to be assigning values of around $3.8 billion for an online image sharing service called Pinterest — a company with no meaningful revenue at all???

4. Art and collectibles surge. Sotheby’s, the famous auction house is soaring to all-time highs and for good reason. The art and collectibles market has gotten a bit frothy as well. A 1963 Ferrari 250 GTO just sold for $25 million — some 49 percent higher than its record price last year. Francis Bacon’s “Three Studies of Lucian Freud” just sold for $142.4 million — the highest grossing art sale ever!

So it could be said that certain financial assets and areas of the market are getting a bit extended and pricey. A lot of this asset inflation is likely the direct consequence of central bank policies to pin interest rates to nearly nothing. This inevitably has led to increased speculation in certain areas.

Along with these concerning factors there is one very popular concern — the economy. People ask me all the time, how can the stock market be rising so much even when economic growth is so tepid? Regular readers already know the answer to this question as I’ve written about this many times but it bears repeating. The stock market is NOT the economy. I repeat, the stock market is not the economy. There is little to no connection between the economic growth and investment returns. Take a look:

March 1960 to December 2010

Year-over-year real GDPchange / S&P 500 annualised gain

>6% / -4.6%

0.5%-6% / 7.2%

<0.5% / 10.5%

(Source: Bureau of Economic Analysis, FactSet, Ned Davis Research Inc.)

If you need a more recent example take China. This is a country that has averaged nearly nine percent GDP growth per year over the past four years, yet has seen its stock market fall almost 20 percent.

What to do?

So with all these worries, complaints and concerns what should one do?

Invest of course.

Wait a second, you say. You just listed a litany of issues and macro concerns and you have many more not even discussed! To this I would defer you to famous investor Seth Klarman. Seth is a huge worrier, as most great investors are. He has, however, not let this prevent him from investing even when he has concerns. He has said: “We have learned over time that we worry top down, but we invest bottom up.” Top down investing involves assessing the economic environment, interest rates and other “big picture” aspects. Bottom-up investing relies on assessing companies and specific securities.

Most great investors will consider the big picture but will not let it sway them from making investments in specific securities that they believe have compelling value. Some of the greatest investors have the ability to diminish their macro views in favour of their micro observations. I have seen far too many people, mainly bears; rigidly conform to an opinion on the economy, the general market, Federal Reserve policy and such, at the expense of missing great opportunities within certain markets or specific securities. Fear and scepticism is crucial for long-term survival but excessive concern is paralysing.

For a bubble to truly develop sentiment is usually euphoric. I don’t really see it at this point. Consumer confidence is still far below its long-term average. For regular readers of this column you probably have seen me post this chart (chart 1) many times. The index measures the average recommended allocation for bonds, stocks, and cash for US chief strategists at Wall Street firms. The red line is the long-term average. Wall Street is nowhere near to falling in love with stocks.

Although it would be difficult to argue people are euphoric about stocks at this juncture, you may surmise people are still more than a little excited about bonds (chart 2)!

I think equities are still under-owned and under-loved. Many of the naysayers are people who have simply missed this massive rally and are incredulous of its validity. I personally do not see excessive optimism or bubble sentiment conditions at this stage. Nor is there anything to suggest valuations are extremely excessive.

Although there are fewer highly attractive investment opportunities than in recent years, and the market will certainly have corrections along the way, there is still value in select opportunities. Be fearful. Be concerned. Be critical. Invest.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Anchor Investment Management Ltd. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision.