Irrational Exuberance Turns 18

It was 18 years ago today that Alan Greenspan gave his famous
“Irrational Exuberance” speech.

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 next day the Dow fell 55 points, and the S&P 500 lost 0.64%. By that point, the market has rallied more than 64% in two years, so some people were clearly nervous.

The bull market, however, was just getting started.

Greenspan’s speech got a lot of attention, but didn’t have much of an impact on the market. The Wilshire 5000 Total Return Index, which includes dividends and just about every stock, climbed another 114% to the March 2000 peak.

Since that day 18 years ago, the Wilshire 5000 Total Return Index has returned 307%. Annualized, that’s 8.11%.

Posted by on December 5th, 2014 at 10:04 am


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