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Irrational Exuberance

New Era Economic Thinking

Stock market expansions are associated with the idea that the future is less uncertain than the past. The term "new era" is used to describe such a time. A Rise in the standard of living coupled with a decline in the impact of economic risks on individuals accelerates the adoption of this term.


This theory emerged after-fact-interpretation of a stock market boom. It appears that the stock market often creates new era theories, as reporters scramble to justify stock price movements.




The first of the three major peaks occurred in June 1901. Observers reported real speculative fervour. The high-tech age, the computer age and the space age seemed to be just around the corner. This period was later referred to as 'The Age of Optimism'.


Many stock market forecasters saw the formation of numerous combinations, trusts and mergers in businesses, as momentous (As an instance- US Steel). Elimination of competition might create monopoly profits for corporations and thus boost their share prices. New era thinking centers on the effects of events currently dominant in the news and little attention is paid to 'what - ifs', even if they have substantial probability. This theory finds it unimaginable that there could be a selling panic among the public.



The Bull market of the 1920s was a time of relatively heightened public enthusiasm and interest in the stock market. There was rapid economic growth and widespread circulation of technological innovation. It was the epoch of massive technological progress with the introduction of automobiles, expansion of radio broadcasting and the like. The merger movement of the 1920 allowed economies of scale. Money started being spent to provide higher standards of living, investments and savings banks. We know from the level of the stock market itself that the public sentiment was tremendously positive in the 1920s.


NEW ERA THINKING OF THE 1950s and 1960s

New era thinking underwent a sudden surge in the 1950s, when the market increased 94.3% in real terms. A substantial growth in earnings was soon witnessed. Investors were pretty optimistic and confident about the prospects of the market. Corporations were cashing in on this prosperity. Early 1950s saw the introduction of televisions. Businesses were able to draw up plans more conveniently for the future. The demand for stocks was stable enough to prevent any downturn. The increase in the use of consumer credit and the election of John Kennedy as the President also contributed to success. In the 1960s, investors believed that if inflation broke out, the stock market would go up rather than down. Thus, inflation became a reason to own stocks. A conceivably notable factor behind the 1960s market peak was the Dow's approach to 1000.



Increased globalization, moderating inflation, falling interest rates, boom in high-tech industries and surging profits, all caused the markets to prosper. In the 1990s, it was again thought that if inflation broke out, the market would go down rather than up. "Bootle" declared that they were entering the "zero era" brought on by global capitalism, privatization and the decline of labour unions. Service employment became more stable than industrial production. There emerged a change in the media's attitude and optimistic hyperbole was out in the 1990s.



High pricing of the market in 1901 was not followed by any immediate price decline. Most of the commentary of the 1920's period focused on the 1920-21 recession, which was unusually severe. Highly speculated prices were described as a thing of the past. Market psychology had at that time become mysteriously negative. The depression of the 1930s gave the idea that our economic system was failing. It was believed that the American economy had reached a stage of stagnation. In 1965, "stagflation" was observed.

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Units 6/13