Dollars and Sense: Is Wall Street showing signs of 'irrational exuberance?'

Wall Street rising. Stocks rose last week. In fact, Monday, Tuesday, and Wednesday continued a winning streak on the Dow that began the week before. The markets seemed to be responding to an upbeat earnings report from Citigroup. Citi is not one of the 30 stocks in the Dow Jones Industrial Average, but financial stocks are weighted heavier in the Dow. Citi’s results pushed other financial stocks up, and that sent the Dow up significantly on Monday. Then on Tuesday, we got better-than-expected earnings reports from JP Morgan Chase and Goldman Sachs, also in the financial sector, as well as Johnson and Johnson and other non-financial stocks.

Irrational exuberance? In fact, things are going so well on Wall Street that Fed Chair Janet Yellen made her own version of an “irrational exuberance” comment. In 1996, then Fed Chair Alan Greenspan made a speech to the American Enterprise Institute. He said the markets were overvalued, warning that “irrational exuberance” was fueling stock market prices. Turns out he was right, but it was not until the tech crash of 2000 and 2001 that his prophesy came to pass. Yellen told congress that the economic recovery was not complete and she said she saw signs of stock market speculation, especially in social media and biotech stocks. Those comments created something of a buzzkill on Wall Street on Tuesday, erasing most of the day’s gains. But the day still managed to finish in positive territory.

Global risks. What Yellen could not do, world events did. A four-day winning streak for the Dow ended on news of the Malaysia Airlines passenger jet that crashed in Ukraine near the Russian border. It’s not unusual for stocks to drop in the hours after such a disaster. Geopolitical risk often unsettles the markets as investors gather more information and find out exactly what happened. And, of course, it wasn’t just the Malaysia Airlines crash. On Thursday, Israel sent ground troops into Gaza. A lot of investors decided to leave well enough alone, take some profits, and sit on the sidelines for a while, which is why the markets dropped so much on Thursday.

Positive domestic news continues. Despite the global troubles, things continue in a modestly positive direction here in the United States. The number of people seeking unemployment benefits fell last week to the lowest level in seven years, and earnings reports remain strong. And there was more merger and acquisition news. Rupert Murdoch’s takeover bid for Time Warner provided the latest indication of continued energy in the merger and acquisition markets, and also gave media stocks a boost. Time Warner rejected Murdoch’s $80 billion offer for the company. Even so, the surprising valuation drove Time Warner stock up 15 percent, Viacom up 4.2 percent, and CBS gained 2 percent.

The week ahead. Earnings season continues, and by the end of next week we’ll know how it’s really shaking out. It will be interesting to see whether strong earnings will trump all the global unrest. My guess is that it will, although some traders might use the unrest as an excuse to do some profit-taking and then actually get around to enjoying their summer vacation.