December 5, 1996 (S&P 500 — 743.25) then-Fed-Chair Alan Greenspan warned us about the “irrational exuberance” he felt was creeping into the market (the “Tech Bubble”).
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
The S&P 500 opened December 1988 at 276.50. By 1996 the index had tripled from the beginning of 1988 and was up almost 6 times since the beginning of 1982 (a prime example of a secular bull market at work). Greenspan was right about irrational exuberance working its way into the market. It was. He was just a few years early. The S&P had another double left in it, peaking at 1550 in March of 2000. Fortunately for him, as was usually the case, his comment was very circumspect/obtuse. As we have pointed out in the past, something Greenspan was well aware of, market prognostication (for that matter any economic prognostication) is very difficult.
“It’s deja vu all over again.” —Lawrence Peter Berra
Cautionary words, such as those offered by Mr. Greenspan, are coming at us all the time. Thank you Yogi for this apt description of the phenomenon. In the case of the stock market the phenomenon decribed is people trying to call a top. Though Greenspan’s “irrational exuberance” is more nuanced than the average pundit, it telegraphed the same message to people knowledgeable about the market … red light, time to be cautious. Last week in the Fed minutes we received a similar message (Deja vu):
More Deja Vus
Here’s a deja vu from a kortsessions.com post dated April 8, 2013, 4 1/2 years ago, “Latecomers Flocking to The Party” … Really, New York Times! The S&P opened the month of April 2013 at 1570. The Times’ article asserted that “latecomers,” individual investors, were flocking to stocks at just the wrong time. Now, here is a post from CNBC’s website dated 11/24/17 (S&P500–2602!) asserting the same situation: “Individual investors jumping in as bull stretches to new highs in late cycle rally”, also suggesting the end is nigh.
Are we there yet?
Might I suggest that we are still early in the last three innings of this secular bull market. Yes, there will be sharp and scary corrections ahead, maybe even a cyclical bear market. But before this secular bull ends everyone will be in love with their stocks. Every night the Nightly Business Report will have remote interviews with investors coming out of their neighborhood Charles Schwab office, brimming with confidence about the market and their holdings. And, they will be saying things like, I’m not worried about a down market … I‘m in stocks for the long-term … where else can you get 8 (9 or 10) percent on your money? This is exactly what they were saying at the top in 2000 and they will say it again. As I have said before, I do not believe we are there yet (at that secular peak). But, if you are looking for empirical evidence of a real secular top, these types of pronouncements would be a good place to start.
More signs of a speculative top
“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.” Financier/ Investor — Bernard Baruch
There is no question that as we begin to top out we will get irrational exuberance; and, just like Yogi said, it will be “deja vu all over again.” That’s the way the market always works.
What’s your take?
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Bill, enjoyed seeing you Friday night. Your comments today are right on target. I also agree that we are not at the top, but the bell curve is beginning to flatten. A few more rate hikes may eventually push things over the top. The economy seems to still be getting stronger for at least another year if not two, but political disrupters have power to cause things to shift rapidly. Keep your thoughts coming. Thanks, M
Mike, thank you so much for your comment and your readership. I might point out that on the question of interest rates it is not a question of “if” but “when.” In the last year and a half the federal funds rate has been increased from .25% to 1.25%. During that period of time the yield on the United States treasury 10 year note has been high at 2.62%. It closed last Friday at 2.35%. I’m not totally sure what the next 1% increase in the fed funds rate is going to do to the price of that Treasury, but even at 3 1/2% on the 10 year we will be still looking at some of the lowest interest-rate’s that we have seen in the past 50 years. That may stop the market. But, again how long will it take us to get to 2 1/2% on the fed funds rate. Based on fed past performance and the continued low level of inflation, it may take some time, which would be nirvana for the stock market when coupled with the current global synchronized economic recovery. Again, this does not mean no sharp setbacks or even a cyclical bear market, but I remain a long-term bull