December 12, 2016
Heritage Investors Investment Strategy

Rational Exuberance?

On Friday, December 9, all three major U.S. stock indexes ended at record highs. For the first time in five years, they each posted gains every day of the trading week. The S&P 500 was up 3.08%, the Dow added 3.06%, and NASDAQ increased 3.59%. International stocks in the MSCI EAFE even gained 2.9%, despite potential risks from the Italian referendum and impending end of the European Central Bank’s quantitative easing. From our vantage point, we see a rally that appears to be picking up steam. Looking at this impressive growth, however, it’s easy to wonder whether the markets are becoming overvalued and a correction is in order. In keeping with this concern, last Monday, December 5, marked the 20th anniversary of Former Federal Reserve Chief Alan Greenspan’s famous warning about “irrational exuberance.” Back in 1996, Greenspan worried that overvalued stocks and extreme investor enthusiasm could drive stocks to reach unsustainable levels. His warning didn’t slow the markets’ growth at the time, and several more years passed before the eventual dot-com crash. So, are we facing the same irrational exuberance as in 1996? Hardly. We’d argue that rather than being overvalued, the markets have yet to reach their fair price. Domestic […]