Full text available at <http://papers.ssrn.com/paper.taf?abstract_id=138170>
>The Good News and the Bad News About Long-Run Stock Market Returns
>STEPHEN H. WRIGHT and DONALD ROBERTSON
>University of Cambridge and University of Cambridge
>October 1998
>DAE Working Paper No. 9822
>
>
>Abstract:
>
>If stock prices followed a random walk, uncertainty about future stock
>prices would be so great that the observed bias towards equities in
>long-term investment portfolios would be surprising. The good news is that
>if, as a growing body of research suggests, there is even a weak tendency
>for stationary valuation indicators to predict future stock prices,
>long-run returns can become markedly more predictable. We illustrate this
>in a cointegrating VAR, with Tobin's "q" as one of the cointegrating
>relations. The bad news is a corollary of the good news: "q" and most
>other indicators point to massive overvaluation at end-1997, and hence the
>prospect of weak stock prices well into the next century.
Of course at end-1998, the valuations were even higher.
Doug