Bull and Bear Markets in the Twentieth Century

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.