I pay attention to a lot of financial news.  Yes, I'm a massive media consumer when it comes to financial news and commentary.  Most of it, I'd say 99.9%, should be ignored by all but the most active day traders.  Investors would be well served to turn off the TV and stop reading so much stock market commentary.  Now that I've killed my chances of becoming a sought-after financial media talking head, let's talk about what really matters.  Should investors be nervous about the stock market rally coming to an abrupt halt?

Since the lows of the financial crisis the stock market, as measured by the S&P 500, has ascended 193%.  I constantly hear experts say the rally is "long in the tooth" or the market is historically over-valued.  Well maybe the rally is "long in the tooth", it's been more than 5 years since the 2009 bottom.  One could make an argument that stocks are over-valued, although I'm inclined to believe they are more fairly valued.  The fact is neither of these two "indicators" are likely to kill the stock market rally.

Historically there are two forces that end a rapidly rising stock market.  They are recessions and rising interest rates.  Often the two are related.  Economic contraction is the biggest long-term negative for the market.  Rising interest rates can kill a rally if they rise too rapidly.  In general, gradually rising rates due to an improving economy don't harm the market.  If they rise too rapidly, they may induce a recession which will have a negative impact on the market.  Below is a graph of the S&P 500 and recessions since the mid 1950's.

Source: dshort.com August 2012

As you can see, most of the largest stock market declines began as the economy was entering a period of contraction.

What does all this mean for the current rally?  It doesn't appear as though interest rates are going to rise rapidly even with the end of quantitative easing.  As for the likelihood of a recession, my favorite indicator to watch is the Conference Board's Leading Economic Index.  The index has been rising steadily for the last few years, indicating continued economic expansion ahead.  Below is a graph of the Leading Economic Index as well as the Coincident Economic Index.

Source: conference-board.org

In conclusion, it may be best for investors to ignore much of the day-to-day financial media talking points and stick to investing in great companies with solid earnings growth.  They would be well-served to watch out for rising interest rates or a severe economic slow-down.  My favorite way to peak into the future is the Conference Board's Leading Economic Index.  It's comprehensive and combines the outlook of ten different leading economic indicators.  Most stock market declines come because of a recession.  Until then, investors should stay the course with the current stock market rally.