On the 20-year anniversary of ‘irrational exuberance,’ investors may now be ‘rationally exuberant’

Monday marks 20 years since former Federal Reserve Chairman Alan Greenspan remarked on investors' "irrational exuberance," a phrase now synonymous with a market that appears overvalued.

Greenspan said at the American Enterprise Institute in Washington, D.C., on Dec. 5, 1996 — at which point the S&P 500 was up 23 percent on the year — that a period of "sustained" low inflation, as history would suggest, gives way to less insecurity, which leads to higher prices of earning assets, like stocks.

"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?" he asked.

Greenspan of course gave this speech on the heels of a runup in U.S. equities at the end of the '90s, which preceded a sharp decline from 2000 to 2002. Nobel laureate economist Robert Shiller, who may have coined the term, cemented its renown with the publication in 2000 of his now-classic book, "Irrational Exuberance."

But 20 years later, as U.S. markets have rallied to all-time highs in recent weeks, the economy is offering plenty of reason to be bullish at these levels, said Jacob Weinig, founding partner at Malachite Capital.

"I think it's a nice time to be exuberant, and to be rationally exuberant about stocks going forward," he said, citing the potential for higher inflation under Donald Trump's presidency, increased rates in a stable economic environment and a strengthening employment picture.

"Following a Trump victory, I think the common logic was that we were going to have a sell-off, followed by a potential relief rally. We've certainly seen that. It's been a very good couple of weeks for the markets, I think significantly faster than we had anticipated," Weinig said Friday on CNBC's "Trading Nation."

The S&P 500 is up about 7 percent year to date, and since the election alone has risen about 2.5 percent.

And whatever one thinks the markets will do in the last weeks of the year, one is hard-pressed to see the type of exuberance that marked the dot-com bubble.

"If we look at the market right now, it's not even close to the environment we had in the late '90s. We don't see these enormous price-earnings ratios, or we don't see these crazy IPOs," said Eddy Elfenbein, editor of the Crossing Wall Street blog.

"The market is maybe a little bit elevated right now, but it's hardly irrational," Elfenbein said Friday on CNBC's "Trading Nation," deeming the markets at these levels a "good place to be."


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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