It's been a super-bullish, some would say too-bullish, year on Wall Street.
The Standard & Poor's 500 index is up more than 24% and near a record. The tech-heavy Nasdaq, home to new tech darlings like Facebook and LinkedIn, is up closer to 30%.
Four of the 10-biggest first-day IPO gains since 2001 — all 100%-plus pops — have occurred in 2013, Renaissance Capital says. And that doesn't even include Twitter's Day One gain of 73%.
And investor optimism is climbing right along with the market. In late October, the percentage of Main Street investors that said they were "bearish," or think stocks will go down, hit its lowest level since January 2012, the American Association of Individual Investors says.
"It is a worrisome sign," says David Kotok, chief investment officer at Cumberland Advisors. "Frothy markets share some common history."
Still, overly exuberant stock markets are hard to pinpoint. And even if signs of froth keep popping up, there's nothing to say stocks can't keep climbing. Former Federal Reserve chairman Alan Greenspan, for example, made his famous "irrational exuberance" speech in December 1996. But his warning did little to dent risk-taking on Wall Street, where stock prices zoomed higher for four more years.
There's no question there are "signs of increasing enthusiasm" in a market that has been driven by the Fed's easy-money policies, says Jurrien Timmer, a portfolio manager at Fidelity Investments. However, "whether the stock market is frothy can be debated."
Right now, he says, the economy and corporate earnings are growing at a modest clip of roughly 3% and 5%, respectively. But stock gains in 2013 are running at a much faster pace. Still, it's hard to say the market is peaking as market reversals caused by sentiment extremes are more predictable at market bottoms when pessimism is high, says Timme! r.
Still, there's no denying investors are eyeing the market with a glass-half-full mentality.
"It is symptomatic of a market which is focused on a bright future," says Woody Dorsey, president of Market Semiotics. "Twitter is an accessory to market froth."
Not everyone is buying into the mania. Ariel Investments, a mutual fund firm that buys undervalued stocks, did not buy Twitter shares.
Tim Fidler, co-portfolio manager of Ariel Appreciation Fund, explains why a hot IPO market suggests stocks might be priced for perfection.
"Companies are taken public when everything is going well, (stock prices are) sometimes peaking, and expectations are high," Fidler says. "For us to get interested, we need a company's stock price to reflect some irrational dislocation from fair value on the downside; which is rare in IPO's, especially front page news events like Twitter."
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