A Teachable Moment for 2022, and Beyond

December 5, 2021

A Teachable Moment for 2022, and Beyond


Good Morning

December 5, 2021, marks a most significant anniversary in the economic and financial history of the United States, and I could not let it pass without comment. When properly appreciated, it can serve as an important teachable moment.

A quarter-century ago, on the night of Thursday, December 5, 1996, that the iconic Federal Reserve chairman Alan Greenspan, speaking at a dinner of the American Enterprise Institute in Washington, gave his instantly legendary “irrational exuberance” speech.

This is what he asked: “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?”

Mr. Greenspan asked these twin rhetorical questions essentially because he did not have conclusive answers. And if he didn’t, you knew no one else in the world did either. Coming from him, however, this thinking out loud was a financial earthquake, and it sent shockwaves throughout the entire financial world.

He surely understood that, when he so much as broached the question, he had at least suggested an answer. And that answer was unmistakable: we’re either already there, or will be soon, as this greatest of all bull markets morphs into mania.

And therefore, I write to you today. I thought it might be instructive—as well as a certain amount of fun—to review the intervening quarter-century.

Let’s begin with a key item of baseline data that may and certainly should inform our inquiry. Fact: The Standard & Poor’s 500-Stock Index had closed that Thursday afternoon at 744.38. And sure enough—just as he presaged—the S&P 500 topped out… three years, three months and 19 days later, on March 24, 2000, at 1,527.50 (Yes, that is sarcasm!).

You read that right: it more than doubled in the 40 months after Greenspan’s dire warning. I suppose I could just stop here, invite you to draw the obvious inference from the above, and call it a day. Of course: No one—no central banker, no economist, no market strategist, no hedge fund manager—no one can predict the market, much less tell you where to get out and/or back in.

The economy cannot be consistently forecast, nor the market consistently timed. By anyone.

But before I let you go, I’d just like to throw out a very few other potentially relevant factoids:

  • As I write this, December 4, 2021, the S&P 500 is at (4602), up more than six times since Greenspan spoke.
  • With dividends reinvested, and any taxes paid from some other source, $10,000 invested in the S&P 500 on 12/5/96 is getting close to $100,000 along about now.
  • The earnings of the S&P 500 for the year 1996 were $40.63. With less than a month to go in the current year, the consensus forecast is around $200, up almost exactly five times.
  • The S&P 500’s cash dividend in 1996 was $14.90. The consensus forecast for this year is about $60, up almost exactly four times.
  • The Consumer Price Index was 158.6 in December 1996. It will most likely close out this year around 280, up a mere 1.8 times.

What, may I ask, was the single best financial decision you could have made on Thursday night, December 5, 1996?

Exactly right: turn off the TV and go to bed. Just my opinion, of course, but the best move you can make this morning, 25 years on, regardless of the headlines? The same: turn off the TV, log out of your computer. Enjoy the rest of your day. And let the compounding proceed, uninterrupted.

With every good wish to you and your families for a wonderful holiday season and 2022.



Sources: Historical S&P 500 Index and dividends: “S&P 500 Earnings History, NYU Stern School.” Consensus 2021 earnings forecast: Yardeni Research. Consensus 2021 dividend forecast: Bloomberg. Consumer Price Index: Inflationdata.com. Current net profit margin of the S&P 500: FactSet.


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