Irrational Exuberance or Nothing Matters and What If It Did

Shah Gilani|June 8, 2020

To say the market’s been on a tear would be like calling the Grand Canyon a ditch.

Last week the Dow ran up 1,727.87 points to end the week 6.8% higher. That’s half the gain in a good year. The S&P rose 4.9%. And the Nasdaq Composite, on an intraday basis, made a new record high, climbing 3.4% on the week.

All week the “honey badger” (Google: honey badger don’t give a damn) proved it don’t give a damn about China, or protests, or politics, or anything. It just keeps on going, doing what it does, keeps going.

And then on Friday, when the world was expecting the U.S. to lose 8 million jobs in May, the unemployment rate was expected to hit 20%, and the market to keep going anyway, only one out of those three things happened.

The U.S. didn’t lose jobs, it gained 2.5 million jobs. And the UE rate didn’t tick up to 20% from the previous months 14.7%, it fell to 13.3%. Of course, the honey badger did what it does.

Is it “irrational exuberance” or are investors taking a nothing matters and what if it did attitude?

It’s both actually.

But the “nothing matters” attitude is at least reasonable.

The irrational exuberance is bound to end, make that blow itself up, eventually. But like the last time we saw IE blow up, in the tech wreck, it took a few years.

The IE moniker pinned on a crazy market is credited to the original Fed put option writer, Alan Greenspan, when in December 1996 he said in a televised speech, “Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. 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?”

He was right, that one time in his career, but his timing was off by four years. Typical Greenspan.

This market is exhibiting that same IE, only on steroids.

How overvalued is it?

In a recent study Leuthold Group strategist Jim Paulsen broke the market into two groups, one containing the top quarter of stocks by valuation and the other the remaining 75% and compared them going back to 1950.

And guess what, the average valuation of the top group went from 26.3 times to 38.3 times, while the average for the remainder of the market went up to 14.5 times from 13.2 times.

That’s IE. Why? Because the super inflated valuations occurred in about two and a half months!

What’s additionally irrational is the fact, missed by most everybody, that the unemployment rate was calculated, by BLS admission, not classifying employed workers who weren’t working because they weren’t at their jobs when they were asked in the survey, as working.

If they’d been classified as not working, which they weren’t, the UE rate would have gone up to 16.3%.

Strange days indeed.

But none of that matters to the honey badger, and what if it did.

I say, go with that attitude. Just know the irrational exuberance is real, and it’s in your face.

Meanwhile, follow the markets higher, as high, and as long as they can keep on truckin’.

Just remember to take your profits off the table when the piper comes calling.

Because he’s coming.

Until then,

Shah