The major bull and bear markets of this century have suggested to many that large
decade-to-decade stock market swings reflect irrational "fads and fashions" that
periodically sweep investors. We argue instead that investors have perceived significant
shifts in the long-run mean rate of future dividend growth. and that stock
prices depend sufficiently sensitively on expectations about the underlying future
growth rate that these perceived shifts would plausibly generate large swings like
those of the twentieth century. We go on to document that analysts who have
often been viewed as "smart money" held assessments of fundamental values
based on their perceptions of future economic growth and technological progress:
the judgments of these analysts, like the assessments of fundamentals we generate
from simple dividend growth forecasting rules, track the major decade-to-decade
swings in the market rather closely.
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