Market Update – December 12, 2016
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.[i] The S&P 500 was up 3.08%, the Dow added 3.06%, and NASDAQ increased 3.59%.[ii] 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.[iii]
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.”[iv] 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.[v]
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.[vi]
Riggs Capital Management, LLC is a branch office of Orchard Securities, LLC. Securities offered through Orchard Securities, LLC, member FINRA/SiPC
[i] http://www.cnbc.com/2016/12/09/us-markets.html
[ii] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1480654800&period2=1481259600&interval=1d&filter=history&frequency=1d
[iii] https://www.msci.com/end-of-day-data-search
[iv] https://www.bloomberg.com/news/articles/2016-12-05/greenspan-s-irrational-exuberance-looks-entrenched-20-years-on
[v] https://www.ftportfolios.com/Commentary/EconomicResearch/2016/11/21/give-thanks-for-the-coming-boom
[vi] http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html