Gen Zers are no doubt baffled by such recent headlines as \u201cFed Chair Powell just had his \u2018irrational exuberance\u2019 moment, Ed Yardeni says\u201d and \u201cDid Jerome Powell Just Say Irrational Exuberance?\u201d Those headlines refer to a long-ago event involving a previous Fed chair, dizzyingly high stock prices, and an eventual market crash. But beware: Some market soothsayers misinterpret that earlier episode, and getting it wrong could misguide today\u2019s investors.<\/p>\n
The headlines were sparked by a Powell appearance where he was asked, after his speech, if today\u2019s record-high stock prices affect Fed policy. He answered, \u201cWe do monitor that, but we\u2019re not targeting any level of prices for particular financial assets. We don\u2019t have a view that we know what the right price of any particular financial asset is.\u201d It was classic circumspect Fed talk. Then he added, \u201cWe do look at overall financial conditions,\u201d and he went further to note, \u201cFor example, equity prices are fairly highly valued.\u201d \u00a0<\/p>\n
Within minutes, the words \u201chighly valued\u201d were pinging through the financial world. The words\u2019 importance was a bit fuzzy. Maybe the Fed would somehow engineer the markets downward, or, with its vast data, it might foresee a market decline.<\/p>\n
Old timers immediately saw the incident\u2019s parallel with a speech Fed Chair Alan Greenspan gave in the 1990s. He mentioned the phrase \u201cirrational exuberance\u201d\u2014in an abstract, what-if way\u2014as a force that might push stock prices too high. No one heard it that way, however. His real message seemed clear: The most influential person in the world\u2019s largest economy thought stock prices were too high.<\/p>\n
Today that speech is widely seen as the set-up for the historic market collapse of 2000 in which many hot new internet companies succumbed. Those recent headline writers are asking: Could Powell\u2019s remark play the same role in a roaring market fueled by AI?<\/p>\n
But that\u2019s not the right question. Greenspan gave his speech in December 1996\u2014almost four years before the market plunge. As he told Fortune years later, \u201cIf you had left the market when I gave my irrational exuberance speech, you would have missed another 80% of increase\u201d in stock values. (Actually, it was closer to 100%.) As for Powell\u2019s talk last Tuesday\u2014despite the to-do, the S&P 500 has barely moved.<\/p>\n
The lesson isn\u2019t that investors tremble when Fed chairs talk about stocks. It\u2019s that investor behavior is a compendium of many forces, and the Fed chief\u2019s views don\u2019t propel markets one way or another. That doesn\u2019t mean Powell is wrong. His simple statement that stocks are highly valued is indisputable. Most measures are screaming that the S&P is insanely overpriced. The Shiller Cyclically Adjusted Price\/Earnings ratio is the highest it has been since the dot-com peak. The price-to-sales ratio hit a new all-time high this week. The Buffett Indicator\u2014ratio of the market\u2019s capitalization to GDP\u2014says stocks are highly overvalued, and Warren Buffett is holding an enormous cash cache because he can\u2019t find bargains.<\/p>\n
The truth is, nobody knows when if the next crash is coming or when. Not even Fed chairs.\n<\/p>\n