Irrational Exuberance Phiroza Katrak

“Irrational exuberance”, former Federal Reserve Chair Alan Greenspan’s iconic phrase and one of the more memorable from the millions that he or any other central banker has uttered. “…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?” was buried deep in a very long speech to American Enterprise Institute in December 1996. Janet Yellen, who was also subsequently Fed Chair, conceded her error of judgement when, having sight of an advance copy, wondered if there’d be anyone awake by the time he got to this part of his address and if it was also simply too mild for his audience to get perturbed.  

Those with long memories will recall Dr Greenspan’s forewarning on the tech bubble (then termed the internet bubble).  Sensing that the Nasdaq, home to many of the biggest internet stocks, was overvalued and reaching unsustainable levels, he was cautioning the stock markets and attempting to talk them down. Contrary to Ms Yellen’s expectation, stock markets listened and swooned briefly but then, shaking off the warning they regained ground, reached new heights and continued partying for another three years until the wheels came spectacularly off in the dot-com crash in March 2000 and the Nasdaq lost around 60% in the 12 months that followed.

The gains in the FTSE 100 and FTSE All Share indices from their lows in March appear pedestrian compared to their American brethren and of late have been anchored around the 6100 and 3400 mark respectively, having traded around that level since June.

In contrast, the dizzying upward trajectory of the S&P-500 stock index in recent weeks, fuelled by the seemingly limitless growth in its top 5 stocks makes one wonder if Greenspan’s pertinent warning should be sounded again. Apple, Microsoft, Amazon, Alphabet (Google’s parent), each with a market of $1 trillion or more, and Facebook comprise around 23% of the S&P-500. So little wonder the index has wiped off all the losses witnessed during March this year at the height of the pandemic scare.  The Dow Jones Industrial Average with just 30 companies represented has also powered ahead. Here too, Apple and Microsoft comprise more than one-fifth of the index.  It took 42 years for the market capitalisation of Apple to hit $1 trillion, it has taken only two more to hit $2 trillion which it did on 19th August this year, the first publicly-traded US company to do so.  

When Tesla unveiled its accounts to 31 December 2019, over the many years of its life it had not yet made an annual profit. However, its share price seems to have mirrored its co-founder’s space ambitions and over the last 12 months soared 880% from $225 to nearly $2000, making it the world’s most valuable automotive company having overtaken Toyota by market cap. Well, you might say, the share price reflects the future, not today, and Tesla will claim in fairness that making a profit hasn’t been part of its master plan, instead market share is and its Model 3 is now the best-selling EV globally.

The economic consequences of Covid-19 on the world economy have been harsh and prolonged, a second wave could stifle the nascent economic growth thus far. Sovereign debt burdens have ballooned, corporate failures and job losses are rising. The promise of a vaccine panacea in the near term at least is just that; many are still in development, their effectiveness unproven at this stage. Sino-US trade tensions are far from resolved.  And yet, fundamentals abandoned, the euphoria in some stock markets appears to hinge the massive fiscal stimulus and policy interventions from central banks the world over and the expectation (or hope) they will grow.

Even though technology stocks have clearly been beneficiaries of the lockdown worldwide, will their relentless onwards-and-upwards march and that of the indices they inhabit continue unabated?  Which public figure will brave the markets and call time on this current bout of exuberance, however they wish to describe it?