On Friday, December 9, all three major U.S. stock indexes ended at record high. For the first time in five years, they each posted gains every day of the trading week.1 The S&P 500 was up 3.08%, the Dow added 3.06%, and NASDAQ increased 3.59%.2 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.3
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.”4 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 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.5
In fact, economist Brian Wesbury posted a video last week predicting the Dow would reach 36,000 in the next four to five years—an increase of more than 84%. He also asserts that the S&P 500 is undervalued by 30% and may gain 14% over the next four quarters.6
Now, we aren’t comfortable making specific predictions like this—because no one can predict the future. But we do agree with Wesbury’s calculations that show the market is undervalued.
In other words, 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 we will continue to make choices based on detailed analysis rather than emotional reactions. This week, we’ll be paying close attention to the Federal Reserve’s December meeting, where the markets currently give a 95% chance that interest rates will increase.7
Remember that we are here to help you capture momentum that will support your long-term goals. We won’t take more risk than is appropriate for your needs and comfort. If you have questions about your priorities, portfolio, or plan, let’s talk.
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