Could US Stocks be Fairly-Valued Under the "New Normal" Paradigm?

Thumbnail Image
Weigand, Robert
Washburn University. School of Business
Kaw Valley Bank
Issue Date
December 2012
Alternative Title
Investors have expressed concern over US stocks' persistent high valuations relative to fundamentals, and the accompanying forecasts of below-average stock returns. This issue is important, as both consumer and business spending is thought to rise and fall with the value of stocks. In this paper I show that perceptions that high valuations and low returns are unusual or abnormal are based on an efficient markets-type of paradigm. When viewed through an alternative framework that allows for more of an adaptive or evolutionary expectations-setting process, and, in particular, economic agents' tendency to overweight recent events, US stocks do not appear nearly as overvalued, and may indeed be priced for the lower expected return equilibrium described by Gross (2009) and El-Erian's (2009) "New Normal" paradigm.