Chapter 6. The Irrational Exuberance Era (1996–1999)


[The Fed chairman's job is] to take away the punch bowl just as the party gets going.

 --William McChesney Martin Jr.

All in all, 1995 had been a damned good year for the markets. The broad indexes gained over 34 percent, more than triple the average annual return. It was the first 30+ percent gain for the S&P 500 in 20 years. The last rally as strong was in 1975 (31.1 percent), following the disastrous recession bear market of 1974 (-29.6 percent).

The 1990s sure weren't the 1970s. This was the early days of a huge tech boom: Semiconductors, software, PCs, the Internet, mobile communications, data storage, and related technologies were all in the early "hockey stick" phase of their growth. When Netscape floated its initial public offering (IPO) in August 1995, it exploded, gaining nearly 500 percent during the first day's trading. Even bigger IPO opening days would soon follow.

The gains were all the more remarkable considering how 1994 had ended: bankruptcy for the nation's wealthiest county (Orange County, California) and a rapidly developing Mexican peso crisis. But the economy was expanding and the Federal Reserve was cutting rates—all was right in the world of stocks and finance.

The year 1996 was nearly as good, tacking 20.3 percent on top of the prior year's gains. In less than two years, the Dow had soared from 3,800 to over 6,600. The market was hot that year—and getting hotter.

It was in this environment that Alan Greenspan ...

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