Irrational Exuberance Then and Now

Late last year I used Alan Greenspan’s 1996 “Irrational Exuberance” speech as a pivot point to look at the subsequent tech stock bubble blow off and collapse. There’s nothing particularly revealing about that speech, but it makes for an interesting reference point because of its place in market history. Greenspan has been shown to be mere mortal, hardly the “maestro” many proclaimed him to be. Still, his remarks in 1996 were followed by dismal returns for many years to come, the intervening bubbles notwithstanding.

Today I use that pivot point again. Since the speech U.S. stocks as measured by the S&P500 have risen about 80% in real terms. Real U.S. GDP has grown 50% in that time. Relative to U.S. GDP, U.S. stocks are 20% higher today than they were then. Many would argue that it’s global economic conditions that matter (even though a large share of listed stocks’ profits are earned in the U.S.) Since the speech, global GDP is up about 80%, which would put today’s market on par with the one Greenspan referred to as “irrationally exuberant”.

Sources: Yahoo! Finance, IMF, FRED (St. Louis Fed)

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