An Optimistic Case for Stocks Prices

Economist Brad DeLong pushes back against the notion that stocks are overvalued and a bad investment at this point. The article is a little long and makes a number of points. He attacks a number of commonly-held views, such as that mean reversion is normal and inevitable, and that the long-term average of valuations is what we should expect as normal. Refer back to this each time you read a gloom and doom piece.

But is there any reason to think that the central tendency of the CAPE today is the same as what it was in the 1880s or the 1950s? There is no unchanging machine buried in the earth for the past 120 years throwing dice to determine the CAPE. It would be much better to say that extreme values of the CAPE are followed by reversion not to but toward the previous historical mean. And dividends and earnings shift too. A much better graph than the CAPE graph is the cumulative reinvested return graph.