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Are we in bubble territory again?

The talk that financial markets have created or are creating another bubble has gotten louder with every upswing of the Dow Jones Industrial Average ($INDU) and the Standard & Poor's 500 Index ($INX). We're in uncharted, all-time-high territory, and that has increased worries that we're about to see a replay of the busts of 2000 and 2007.

How worried should we be?

I think worries about the stock market, in particular the U.S. stock market, are overstated at this point.

That doesn't mean, however, that we shouldn't worry about certain parts of the financial market. In particular, I'm worried about the parts of the fixed-income market where traders and investors seem willing to overlook risk if they can just pick up a bit of yield.

Growth is indeed anemic in the much of the world, and China doesn't appear to be willing to step up its economic-stimulus program to return to the days of 10% annual GDP growth. (That's a good thing, by the way.)

But as long as the world's central banks keep pumping money into financial markets, I think equity prices have decent support at recent levels.

Rally enablers or rally killers?

I wouldn't call anything cheap here; some individual stocks are overvalued, and I think that some technical measures are close to calling this market overbought. But I don't see anything like the mania of 1999, when analysts fell all over themselves to see who could raise the target price for Amazon.com (AMZN) the most for any given day.

image: Jim Jubak

Jim Jubak

As far as hype goes, this is still a relatively subdued market. For example, at $26.68, the May 10 closing price, Facebook (FB) is still more than $11 below its initial public offering price of $38.

To get a 2000- or 2007-style bust, we'd need to see central banks go from net providers of cash -- rally enablers -- to net withdrawers of cash -- rally killers. And I just don't see that yet, even in the United States.

However, saying that we're not likely to see another stock-market bust of the 25%-or-more variety doesn't mean I think we won't get a more modest pullback. The U.S. stock market is on the verge of moving into overbought territory and looks increasingly vulnerable to a mild 3% to 7% retreat.

The European stock market seems to be on shakier footing. European stock markets have rallied recently, even though many of Europe's biggest companies have reported disappointing first-quarter earnings and have guided investors to expect lower revenue for the rest of 2013. Expectations were low going into the first quarter, and yet 59% of the companies that have reported so far have missed consensus projections.

Looking ahead, Siemens (SI) and Alstom (ALO.FP in Paris) have cut forecasts for 2013. Alstom, for example, cut its forecast for three-year sales growth to 5% from an earlier 8%. This week, data from eurozone economies are expected to show that gross domestic product for the group dropped in the first quarter. That would mark a sixth consecutive quarter of contraction.

On the equity side, though, I think the risk profile is highest for stocks in emerging markets. That's not because these economies are showing particularly lackluster growth (well, Brazil is) but because, on recent form, when investors get nervous about risk, they sell emerging-market equities first.

In any stumble in the U.S. or European markets or economies, the biggest damage to stocks is likely to be not in those markets -- in fact, U.S. stocks could climb on a rise in worries about global growth because the U.S. markets and the dollar are the safe havens of the moment -- but in such markets as Brazil, China, the Philippines, Indonesia and Turkey.

First to go

As perverse as it may seem, if you're worried about a dip in U.S. markets, you should probably start your thinking about what to sell among your emerging-market holdings. (And given that these stocks are likely to fall hardest in any U.S. dip, emerging markets should be at the top of your buy list once fear has taken its toll.)

As I said, though, my biggest worries aren't on the equity side.

If you're looking to make an argument for a bust (and not just a dip), I think you have to look at the fixed-income side.

I'm not worried about such deep, plain-vanilla markets as that for U.S. Treasurys. In fact, recent news suggests that Treasury prices at the short-end of maturities might be set to rise over the summer months.

Forecasts from the Congressional Budget Office say that-- thanks to spending cuts, tax increases and a recovering U.S. economy -- the 2013 budget deficit, at $845 billion, will be the smallest since 2008. That's likely to lead to a reduction in the number of notes with maturities of five years or less that the Treasury offers for sale. The reduction, if there is one, could come as soon as the July auctions. Fewer Treasurys for sale at a time when global investors are looking to buy dollar-denominated assets would likely result in higher prices (and lower yields) on Treasurys.

I'm not even especially worried about eurozone bond markets, where yields for Italian and Spanish debt have held steady in recent auctions. A few more editorials by German Finance Minister Wolfgang Schäuble like that in Monday's Financial Times (registration required) might change that. (In the piece, Schäuble argues that the treaties governing the eurozone are not sufficient to support current plans for creating a eurozone-wide authority to rescue or shut down weak banks.) However, as long as the financial markets believe that the European Central Bank guarantees the euro, I don't think these markets are likely to see a spike in yields and a collapse in prices.

If you're looking for danger in the fixed-income markets, I think you need to look at far-less-liquid markets, where prices are far more volatile and are near historic highs.

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