Although there are rumblings that the market is approaching another period of “irrational exuberance,” a recent Wall Street Journal article by Mark Hulbert argues that a “close look at the data suggests things are nowhere near that heated.”
Hulbert writes, “That doesn’t mean the stock market won’t fall in coming months, of course. But if it does, it will be for reasons other than speculative excesses rivaling those of two decades ago.”
While Hulbert notes that signs point to some pockets of irrational exuberance—a term coined by Alan Greenspan (then-chairman of the Fed) in 1996—the current situation is “far different than concluding that the market as a whole is as frothy as it was in the late 1990s.” According to the following variables for investor sentiment (identified in a study done 20 years ago), Hulbert argues, “the current market is far less exuberant than in the late 1990s:”
- In 1999, the number of initial public offerings was much lower, and the average first-day return was much higher, “indicating a much cooler market today.”
- The percentage of capital companies are now raising in equity is less than half what it was in 1999—“the theory goes that during periods of irrational exuberance,” Hulbert explains, “companies increasingly turn to the equity market to raise capital.”
- Relative valuations of dividend-paying and non-dividend-paying companies, considered by some as a strong proxy for investor exuberance, show that dividend payers are showing an average price-to-book ratio 44% higher than that of nonpayers. In contrast, the data shows that at the top of the internet bubble, the price-book ratio of the average nonpayer was more than double that of dividend payers.
- The amount by which the average fund’s price is below its per-share net asset value (known as the “closed-end-fund discount”) widened to one of the largest in history, Hulbert notes, suggesting “extreme investor pessimism.”
Hulbert concludes, “we can confidently say that the current market environment isn’t nearly as exuberant as it was at the top of the internet-stock bubble.”
