Euphoric investor sentiment has no happy ending

A lesson from the tech frenzy of the 1990s: The sooner speculative bubbles get pricked, the better.

In December 1996, Alan Greenspan, then chairman of the United States Federal Reserve, warned about sharply rising stocks saying ‘irrational exuberance’ could drive prices to unrealistic levels and then collapse. After these comments, the S&P 500 Index—the best gauge of large-cap US stocks—came under slight pressure, but ended the year up 20 percent anyway. This followed a 34 percent surge in 1995. Greenspan’s warning was not backed by policy. He was merely trying to jawbone. The S&P 500 went on to rally 31 percent in 1997, 27 percent in 1998 and 20 percent in 1999. The bubble burst in 2000, which fell 10 percent, followed by drops of 13 percent in 2001 and 23 percent in 2002.