Happy Anniversary! Well, the first question that should pop into your mind should be . . . “Awesome Lon, what are we celebrating?” It was exactly a quarter of a century ago, that one of the most famous quotes in finance history was uttered by the most revered Fed Chairman in history. On December 5th, 1996, Fed Chairman Alan Greenspan spoke at the dinner of the American Enterprise Institute and gave us his legendary “irrational exuberance” speech.
During that iconic speech Chairman Greenspan uttered the words that went down in the annals of financial history when he asked the dinner guests “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contraction as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”
I have a sneaking suspicion that Mr. Greenspan knew his question to be rhetorical, because he certainly didn’t know the answer, nor did anyone else for that matter. Not a single person who attended the dinner that evening had a clue as to the historical significance of Mr. Greenspan’s speech, or how “irrational exuberance” would reverberate throughout the financial world for the next 25 years. I mean if the powers-that-be are worried about “irrational exuberance” within financial markets and the economy, then how can the average-joe investor ever be comfortable again investing in a long-term equity portfolio?
Well let’s celebrate this anniversary with a little “factcheck” party (because history is filled with facts):
- The S&P 500 Index closed that evening at 744.38. Just as he expressed concerns of “irrational exuberance”, the S&P 500 topped out . . . three years, three months and 19 days later on March 24, 2000 at 1,527.50. Yup, you read that right, the S&P 500 more than doubled in the 40 months from his dire warnings of “irrational exuberance”.
- And what does it look like today? The S&P 500 Index closed Dec 3rd, 2021 (the most recent trading day before the anniversary) at 4,583, some six times higher since that Dec 5th, 1996 night.
- The S&P 500’s cash dividend in 1996 was $14.90. consensus forecast for this year is about $60, up almost exactly four times.
- The earnings of the S&P 500 companies finished at $40.63 for 1996. With less than a month to go in the current year, the consensus forecast is around $200, up almost exactly five times.
- The Consumer Price Index was 158.6 in December 1996. It, in all likelihood will finish 2021 somewhere around 280, up a mere 1.8 times.
Now of course, I will fully disclose to all the cynics, that you are correct – I do not (and never portended to) know exactly what the future holds for the equity markets. No one - no central banker, no economist, no politician, no market strategist, no “who thinks he’s a stock market guru” neighbor, no annoying “smart know-it-all” family member, no doomsday “I got out of the markets a long time ago” friend – NO ONE can predict the markets, much less give you advice on when you get out and/or get back in. There are no facts about the future. Plain and simple.
My advice has consistently remained the same – Log off, disconnect, and step away from the headlines of today.
Go jogging, go fishing, go outside, visit a friend, anything that allows you to enjoy your time.
And continue to let your compounding proceed, uninterrupted.