NEW YORK (TheStreet) -- Are stocks in a bubble inflated by Federal Reserve funny money? No.Do headlines and many investors think they are? Yes! And that's a great sign this bull market has room to run. It probably seems weird to say rising stocks plus dour investors means no bubble. To many, the mismatch means stocks have strayed too far from expectations and must return to earth. However, true bubbles happen when sentiment -- investors' expectations -- is sky-high. As Sir John Templeton once said: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Bubbles pop -- and bear markets begin -- when euphoric investors don't notice deteriorating fundamentals. In late 1999 and early 2000, for example, investors cheered scores of new dot-com initial public offerings, claiming their unprofitable business models didn't matter. Clicks ruled. Meanwhile, the U.S. Leading Economic Index (LEI) was falling, signaling a coming recession -- bad news for all those unprofitable tech firms -- but investors bid stocks higher and higher, paying a huge premium for future earnings that never came. What followed was one of the biggest bear markets in history. Today, we have the opposite. Investors are near-universally skeptical, fretting many of the long-running sore spots they've grappled with since the last bear ended including Fed policy, budget bickering and a slow economic recovery. As a result, most don't notice the fundamental economic strength around them. It's true the recovery as measured by headline GDP is one of the slowest in modern history. But slow growth is largely a function of falling government spending. Public spending and investment have detracted from headline growth in 12 of this expansion's 16 quarters. Private-sector components have done much better. Business investment alone has more than compensated for public-sector cuts. Folks just can't see it because the headline figures are so muted. Fundamental strength is evident worldwide, too. Global growth is accelerating. The UK has sped up since the Bank of England ended quantitative easing (QE) last November. Despite a modest, gradual reduction in the BOE's balance sheet, GDP accelerated sequentially in the first and second quarters while the purchasing managers indexes (PMI) for services, manufacturing and construction point to continued growth in the third quarter.
Particular strength in the forward-looking new orders components implies more growth from here. The eurozone emerged from its 18-month recession in the second quarter with even the long-suffering periphery stabilizing (Spain) or returning to growth (Ireland and Portugal). There, too, PMIs point to continued growth in the third quarter, again led by new orders. Emerging Markets are also holding up well, with China moving further away from the long-dreaded hard landing throughout the third quarter. Political drivers appear strong, too. Folks fret U.S. gridlock due to its impact on budget and debt-ceiling negotiations, but gridlock is much more bullish than not. Do-nothing Congresses have little chance of disrupting markets with extreme legislation impacting things like property rights. Germany is in a similar boat, with a center-right/center-left coalition, led by Chancellor Angela Merkel, the likeliest outcome from last month's election. In countries where governments are more united, like Mexico, leaders are using their clout to pass sweeping market-oriented reforms--powerful drivers of future growth and corporate profitability. All add up to a great fundamental backdrop for stocks. Investors have plenty to be optimistic about, but they aren't. They're focused on things like the sequestration, the debt ceiling, the government shutdown -- and then there is the Fed. Folks broadly remain preoccupied with the potential end of QE, worried about what will happen to the economy and stocks once the Fed pulls the punchbowl (never mind that they feared QE itself while it was new. You can't have it both ways). Most don't realize the punchbowl is laced with sedatives, not stimulants. By purchasing long-term bonds, the Fed flattened the yield curve -- the difference between short- and long-term interest rates -- shrinking banks' net interest margins, a key source of banks' operating profits. This created a disincentive to lend, a big reason growth in M2, the broad money supply, hasn't matched growth in the monetary base. Credit has tightened as a result, weighing on growth. Once QE ends, the yield spread should widen, creating fuel for faster growth. Spreads have already started widening in the run-up to QE's end. Yet, instead of cheering this economic tailwind, investors have fretted the impact of rising long rates. Another false fear to go with false fears of the economy and markets tanking without QE, the debt ceiling, gridlock and others. False fears are bullish. As reality proves them wrong, it creates future equity demand. It's rather like investors having to cover short positions when whichever bad thing they bet on doesn't happen. Better-than-expected reality gives investors more confidence in stocks' future earnings, and they become willing to pay ever more for a share of it. This doesn't happen overnight. Confidence gradually ascends as sentiment improves. That sentiment remains so skeptical today tells us this bull may have plenty of room to run before it reaches its euphoric heights. This article was written by an independent contributor, separate from TheStreet's regular news coverage.