We’ve entered into new territory. In early May, the US stock market hit new record highs for the first time this century. And for this, let us now praise Carmen Reinhart and Ken Rogoff (“R&R”), two Harvard economists whose book propped up the fiscal austerity movement.

R&R’s work, This Time is Different: Eight Centuries of Financial Follies, was published in the fall of 2009. It drew data from hundreds of countries worldwide. Its key finding: when public debt exceeds 90 percent of GDP, economic growth begins to slow. As if on cue, the US hit the dreaded 90 percent level in 2010.

But we can rest easy. This spring, the 90 percent cutoff was discredited, due to errors in the number crunching. (Still, we think high public debt is probably a drag on economic growth, although exactly when is unclear.)

More importantly, by the time R&R’s error was discovered, the austerity forces had already had their way. R&R’s findings had helped to pass The Budget Control Act of 2011, which required the US government to make big, across-the-board spending reductions or face billions in automatic spending cuts.

Thus this winter, some $44 billion in automatic spending cuts did go into effect. And the reality of the sequestration is starting to set in—a shrinking defense budget, furloughed air traffic controllers, cuts to social programs—all a threat to economic growth.

So why are the markets so happy?

We think that so far, the US budget cuts are being perceived as a welcome offset for the Federal Reserve’s ongoing, unprecedented and somewhat disconcerting monetary stimulus. The Fed recently yet again reaffirmed its commitment to pumping $80 billion worth of liquidity per month into the economy.

Balancing act. While the Fed continues to supply monetary fuel for the economy, Congress (through current and proposed government budget cuts) is stepping lightly—we hope—on the brakes. So we’ve achieved a tenuous balance, if only psychologically, which is comforting for investors but may not last very long.

This year, US economic growth is expected to be mediocre (2 percent). Unemployment now at 7.5 percent is more than the Fed is targeting and inflation way less.

As long as the numbers are this middling, the Fed isn’t likely to turn off its monetary spigot. Yet as middling as they are, the numbers do confirm we’re on track: the economy is growing, albeit slowly, and inflation isn’t an issue.

Still, given that the S&P is up 140 percent since early 2009, and the precarious balance between US fiscal and monetary policy, it’s wise to remain cautious. We continue to advocate a focus on reasonably priced growth stocks and high-quality dividend plays. This issue is full of ideas on these specific topics and more.