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 even gained 2.9%, despite potential risks from the Italian referendum and impending end of the European Central Bank's quantitative easing. U.S. Corporate Bonds were the only laggard, losing 0.29% on the week.

The weight of the evidence seems to be pointing to an equity market 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.

As an interesting coincidence 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. He was eventually correct, but the warning didn't slow the markets' growth at the time, and several more years passed before the eventual dot-com selloff. 

So, are we facing the same irrational exuberance as in 1996?

Hardly. Research is suggesting that rather than being overvalued, the markets have yet to reach their fair price. Domestic fundamentals continue to provide positive data on the economy. With a new Presidential administration coming in 2017, we may see regulations lift and banks push more money into the economy, causing growth to accelerate.  

The markets' recent growth seems to be based on rational exuberance. Investors see opportunities on the horizon, and they're ready to grab them.

What's ahead in this exuberant moment?

We're happy to see new potential for growth, but it is important to continue to make choices based on detailed analysis rather than emotional reactions. This week, investors will be paying close attention to the Federal Reserve's December meeting, where the markets currently give a 95% chance that interest rates under their control will increase, although the amount of change should be minimal.

Remember in times like these that maintaining a diversified portfolio is what helps to smooth out the ups and downs of investing over time. For example, the same bond-related holdings that protected capital during the equity selloff in January of this year have now been in a selloff of their own since the election. So even though stocks may continue to do well, it could actually be the bond market that is providing the most value opportunities currently.

Regardless of how things play out, we will continue to monitor, adjust and keep you informed