From Brad DeLong’s Semi-Daily Journal

Back in 1996 Yale economist Robert Shiller wrote:

Price Earnings Ratios as Forecasters of Returns: The theory that the stock market is approximately a random walk does not look right at all: Figure 1… show[s]… the ratio of the real Standard and Poor Index ten years later to the real index today (on the y axis) versus… the ratio of the real Standard and Poor Composite Index for the first year of the ten year interval, divided by a lagged thirty year moving average of real earnings…. If real stock prices were a random walk, they should be unforecastable, and there should really be no relation here between y and x. There certainly appears to be a distinct negative relation here. The January 1996 value for the ratio shown on the horizontal axis is 29.72, shown on the figure with a vertical line. Looking at the diagram, it is hard to come away without a feeling that the market is quite likely to decline substantially in value over the succeeding ten years; it appears that long run investors should stay out of the market for the next decade…