That old irrational exuberance

Posted: Thursday, August 17, 2000

NEW YORK (AP) -- The stock market continues to bounce around every day, rising or falling or drifting sideways as it has always done since opening day 208 years ago on a sidewalk here.

Occasionally it erupts in a burst of enthusiasm, but often that buying is nullified the next day or eroded by the end of the week. Something is missing. It just isn't ''irrationally exuberant'' anymore.

The phrase will always be associated with Alan Greenspan who, in December 1996, observed that buyers of stocks were acting a bit crazy, borrowing money on credit cards and remortgaging the house to make a fast dollar (say in a day or so) on volatile stocks.

Though his message was delivered from a very authoritative platform, that of the chairmanship of the Federal Reserve, it went unheeded. He was accused of being a worrywart, an economist from the old school and ideas no longer relevant in the new economy.

The party went on, with Greenspan the wallflower. Rather than join in the fun, he initiated a series of interest rate increases aimed at curbing inflation. The party continued.

The rate increases, said Greenspan, were necessary if the economy was to avoid inflation. But everyone new he viewed the stock market as the vehicle, the provider of money, for inflation.

His message went unheeded. If the market in late 1996 had been irrational, what term could be applied to the market in late 1999, at which point the market had surged above 11,000 from the 6,500 level three years before? The rationale was familiar: ''Momentum's the name of the game. If a stock is moving jump aboard for the ride. It's free.''

Greenspan kept raising rates, upping the pressure. To him, inflation was the great economic sin, a lack of discipline, a rottenness that infected all other areas of a healthy economy and would inevitably bring it down.

He won. The rationality so absent among investors began to reappear. Scores of stocks driven to market prices that sales and earnings could not support began coming back to earth last year.

The declines drove a wedge of fear into expectations, and buyers hesitated before committing their funds to the market. Formerly exuberant investors were shocked into realizing their fortunes were fantasy. Why some even began talking about value -- stocks with earnings, good management, good products -- rather than momentum.

Irrational exuberance, which Greenspan had feared was ruling the market since the mid-'90s, had done such a slow fade it went relatively unnoticed until recently.

''It is easy not to notice that after over 200 frenetic days in 2000, the Standard & Poor's 500 has risen just 0.24 percent this year,'' Berry Cox and Rupert Goodwin of Donaldson, Lufkin & Jenrette observed in that company's ''Portfolio Managers Weekly.''

And Jim Griffen, economist with Aeltus Investment Management, comments that ''The news is terrific -- inflation, earnings growth, interest rates, dollar, Fed -- but the market is flat.''

''What's up with that?'' he asks.

Could it be the decline of that old irrational exuberance?

End Adv PMs Thursday, August 17.

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