The Returns to US Common Stocks from 1871 to 2010

Abstract

We have already examined whether the monetary expansion in the US economy from 1914 to 1929 was neutral from the perspective of stock market valuation ratios and real dividend growth in Chapter 3. The second part of the boom, from 1927 to 1929, whilst controlling for the effect of the increase in earnings and dividends due to the monetary changes which were occurring during this period, is a topic that is much harder to resolve. We are able to test whether a potential deviation from rational valuations occurred from 1927–9, in three ways:

• 1. At the aggregate level using a DDM.

• 2. In the cross-section of the stock market.

• 3. At the industry level based on industrial growth models for a new technology industry — aviation.