The Dow is above 16,000.  The S&P is above 1,800.  The NASDAQ is above 4,000.  The stock market is roaring and not much seems to be able to stop it.

There are some who think stocks are in bubble territory.  There are others who say that is ridiculous and that prices reflect the fundamentals.

I think it all depends on how you define a bubble.  Stocks may be in a bubble, but it could still be far from the peak.  We might see stocks go up another 50% before we see a crash back down.

There is one thing that is almost irrefutable and that is that the stock market is being held up by the Fed and its monetary policy.  I think even most stock bulls would agree with that.  It really became obvious over the summer when there would be speculation of a Fed “taper” and stocks would fall.  Then a few Fed officials would come out and say that the tapering will be minor or that it might be further down the road than originally anticipated.  Then stocks would go back up.

The Fed has been pumping in about $85 billion per month for almost a year now.  The Fed has more than quadrupled the adjusted monetary base over the last 5 years.  It is on its way to being quintupled.

So it shouldn’t really surprise anyone that stocks are doing well.  When there is monetary inflation, it doesn’t spread out evenly across the economy.  The new money goes into hot spots.  Stocks are probably the hottest place right now.  Real estate has picked up too, but not as much as stocks.

The biggest surprise for me is that gold hasn’t caught fire yet.  If the Fed monetary inflation continues, perhaps this will be the next hot spot.  We can’t really know for sure, as it depends on the decision making of millions of people.

The Dow and S&P 500 are hitting all-time highs, at least in nominal terms.  The NASDAQ is still short of its all-time high.  It briefly was above the 5,000 mark back in 2000.  That was a true bubble and that bubble burst in a major way.

It is very difficult to determine the direction stocks will take.  Of course, anyone who knew this with certainty would probably be a billionaire in the making.  But sometimes we can take good guesses as to the general direction.  For now, the direction seems to be up.  But everything is dependent on monetary policy going forward and the market reaction to it.

The one thing I am fairly certain about is that stock prices don’t have a lot to do with business fundamentals right now, at least in the traditional sense.  You may be able to pick some good individual stocks on this basis, but you will not be successful with the broad market.

Most of it will be decided by Fed policy.  If the Fed ups the ante or if banks start lending more, then I would expect stocks to keep going up in general.  If the Fed really does taper significantly and the banks keep their excess reserves high, then a downturn in stocks is far more likely.

We will keep watching what the Fed says and does.  The central bank dramatically affects our investments.  It shouldn’t be this way, but that is the reality we live in and that is the reality we have to deal with.