We’ve hit a record with the Dow and are getting very close with the S&P 500. Excitement is building, and the expectation is that stock prices will continue to rise. They may, for a while, based on the psychology alone, but as I discussed in the CFA Institute post last week, the financial fundamentals have to come into play at some point.

Ultimately, for a market rally to be sustainable, earnings per share—the metric that defines the financial benefit to shareholders—has to increase. The question now is whether the current rally is actually based on increases in earnings and, if so, whether that growth can continue.

— Guest post from Peter Essele, CFA^®, senior investment research analyst

To assess the riskiness of the highest-yielding area of the bond market relative to that of the equity market, we produced the chart below. The line shows the difference between the average yield for the high-yield market and the average yield for the top 10 percent of securities in the S&P 500. For instance, the current reading of 0.45 is the result of subtracting the average yield of higher-yielding equities (5.33) from the average yield in the high-yield market (5.78).

I was thinking about market valuations this morning in light of some of the volatility we saw last month and some discussions we’ve had internally.

For illustrative purposes Apple is a good stock to look at for this kind of discussion. By some metrics Apple could still be considered inexpensive, but it’s uncertain whether it can continue to grow sales as fast as it has. How much of the valuation is based on the assumption of continued sales growth, and how will the stock price be affected if sales growth slows?

The interesting story today is the stock market, as it manages to shrug off the worries from Europe, the sequester, and a power higher. The Dow Jones Industrial Average is closing in on its all-time high, set in October 2007. The S&P 500 Index is not quite—but almost—as close to the high that was set around the same time. Are happy days here again?

The numbers I mention above are a bit misleading, in ways both positive and negative. For both indices, if you include dividends paid over the time since the previous highs, we have already passed them. This would be positive. If you look at the indices adjusted for inflation, however, we are further away, which is negative. The key is that, surpassing the previous levels would just be numbers, with more psychological than economic significance.

“Those who can’t remember the past are condemned to repeat it.” — George Santayana

The quote above is often used to describe one of Ben Bernanke’s prime qualifications for his position as chairman of the Federal Reserve. As a student of the Depression, it is said, he has a unique perspective on what happened then and knows what has to happen now to avoid a repeat. Put another way, he understands the mistakes that were made last time so we can avoid them this time.

In my post on currencies a couple of days ago, in which I discussed the strength and weakness of various currencies with respect to one another, the question I left unaddressed is what determines those relative values and whether there is in fact a “right answer” as to the value of each currency.

As is common with economic questions, there are several right answers, depending on how you look at it. One way to consider the value of one currency relative to another is to look at the markets—how many yen will it take to buy a dollar? The foreign exchange, or forex, markets are among the largest in the world. When currencies are allowed to freely float, or trade at will, the markets will determine what a currency is worth. This is the most transparent and informative way to set values, as it reflects a wide, liquid market with many participants.

Here in the U.S., we are pretty lucky. We transact all of our business in dollars, and it never occurs to most of us to think about other currencies until we travel outside the U.S. It just doesn’t enter into our consciousness that we should care, or need to care, about the dollar itself. Like air, we take it for granted.

But, like air, when things turn bad, we have to start paying attention pretty quickly. Again, here in the U.S. we have never really had to cope much with that problem. As the “reserve currency,” the U.S. dollar is the currency for most of world trade, and therefore everyone else has to hold dollars in one form or another if they want to trade with the U.S.—and they do. We have a built-in demand for our currency that supports its value. The benefit is that we can buy things made in other countries cheaper, in dollar terms, if the dollar is strong.

I have spent some time looking at the fourth-quarter GDP report over the past couple days, but it occurred to me that it might be helpful to step back and take a look at exactly what GDP is, what it is composed of, how growth happens, and what it means. This is essential to understanding any analysis of what happened in the fourth quarter.

Last week, I discussed three books that offer a good basic overview of how to invest in stocks. The next step—and, in many ways, a more difficult one—is to figure out how to apply the conclusions you’ve drawn. How can you identify the stocks that meet your criteria?

There are several services that rate stocks. Value Line is one of the oldest and apparently has a great track record. Its rating system is fairly simple, and its data sheets present a lot of information very effectively. Many other screening systems rest on a Value Line base, selecting their stocks from among those that VL ranks highest for timeliness or other factors. Another significant advantage: The weekly hard-copy version of Value Line is available in many libraries for free, which is how I used to use it. It’s definitely worth a look.

With the economy recovering, the market doing well, and the politicians seemingly getting down to the business of actually negotiating rather than yelling at one another, people are feeling more cheerful, especially about the stock market. Investor surveys are at very high levels for confidence, volatility is at historically low levels, and U.S. markets are closing in on all-time highs. What’s not to like?

Actually, there are a lot of reasons to be concerned—which I have written about in the past and will do so in the future—including the fact that high levels of bullishness are themselves contrary indicators. Today, however, is about how to invest in individual stocks, rather than about the market as a whole, and here there are encouraging signs.