The Dow Jones average broke 25,000 today. The Dow has risen 28% in the past year and the S&P 500 has risen 21%.
“Irrational exuberance” is a phrase used by the then-Federal Reserve Board chairman, Alan Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble of the 1990s. The stock market was on a tear. We all know how that ended.
The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000.
What is happening in today’s stock market seems to me to be the same sort of irrational behavior. The Dow price earnings ratio is now at 22.08 and the historical average is about 15. But famed economist Robert Shiller indicated he was not alarmed when being interviewed on CNBC this past September.
“It’s not just a matter of low interest rates, it’s something about the American atmosphere. It’s partly the Trump atmosphere. Investors love this. I can’t exactly explain – maybe it has something to do with prospective tax cuts. But I don’t think it’s just that. It’s something deeper, and it’s pushing the American market up,” he added.
Unlike 1929, Shiller pointed out there’s not much talk about people borrowing exorbitant amounts of money to buy stocks. Plus, he noted there’s now more regulation.
I am somewhat mollified.
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