I’ve posted Entry #8 to my monthly column on Valuation-Informed Indexing at the Financial Highway site. It’s called The Market Has a Memory.
Juicy Excerpt: Shiller has shown with his research that the valuation level that applies today affects the price that will apply for stocks 10 years from today and 15 years from today and 20 years from today. The correlation between valuation levels and long-termstock prices is strong and has been strong for as far back as records have been kept. That’s 1870). That’s a time-period of 140 years.
This is a reality that the Buy-and-Holders cannot explain. If it is daily economic and political events that determine stock prices, why would the valuation level that applies today affect the stock price that applies 10 years from today? It shouldn’t. If the market were efficient, the P/E10 value would be a meaningless number. It is impossible to reconcile Shiller’s findings with Fama’s hypothesis.