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Changing Times, Changing Values: A Historical Analysis of Sectors within the US Stock Market 1872-2013

76 Pages Posted: 11 Jun 2014 Last revised: 18 Jun 2014

Oliver Bunn

Yale University - Department of Economics

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

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Date Written: June 2014

Abstract

We construct a price, dividend, and earnings series for the Industrials sector, the Utilities sector, and the Railroads sector from the beginning of the 1870s until the beginning of the year 2013 from primary sources. To infer about mispricings in the sector markets over more than a century, we investigate the forecasting power of the Cyclically Adjusted Price-Earnings (CAPE) ratio for these sectors. With regard to the CAPE ratio, which has originally been devised and employed by Campbell and Shiller (1988, 1998, 2001) as well as Shiller (2005), we define a methodological improvement to this ratio to not only be robust to inflationary changes, but also to changes in corporate payout policy. We then update the original evidence from Campbell and Shiller (1998, 2001) of the return predictability of the CAPE ratio for the overall stock market and furthermore extend this evidence to the three aforementioned sectors individually. Whereas this part of our analysis focuses on each sector of the US economy in isolation, we subsequently construct an indicator from the CAPE ratio that enables us to perform valuation comparisons across sectors. In addition to establishing the prediction of subsequent return differences based on differences in the CAPE-based valuation indicator, we also suggest a hypothetical, historical, and simple value investment strategy that rotates between the three sectors based on the valuation signals derived from the CAPE-based indicator, generating slightly more than 1:09% annualized, inflation-adjusted excess total return over the market benchmark during a period of nearly 110 years.

Keywords: Cyclically adjusted price-earnings ratio, historic valuation of sectors of US economy, long-term predictability

JEL Classification: E37, G11, G14, G17, N20

Suggested Citation

Bunn, Oliver and Shiller, Robert J., Changing Times, Changing Values: A Historical Analysis of Sectors within the US Stock Market 1872-2013 (June 2014). Cowles Foundation Discussion Paper No. 1950. Available at SSRN: https://ssrn.com/abstract=2447654

Oliver Bunn

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Robert J. Shiller (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
203-432-3708 (Phone)

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3708 (Phone)
203-432-6167 (Fax)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3708 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://www.econ.yale.edu/~shiller/

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