Were Stocks Underpriced in 1929?

I’ve never heard this argument before:

Consider the Great Depression, which, we were taught, was the ultimate morality play. The 1920s markets were bubbly madness. Little true growth underlay the price increases. Then came 1929. The decade of splurge required a decade of penance.
This cuts out a lot of reality. While the stock market of the late ’20s was probably too high, it was not high enough to cause “The Grapes of Wrath.” A few years ago, Edward Prescott, a Nobel Prize winner, and Ellen McGrattan looked at the Dow in a paper for the Minneapolis Fed. Stock prices relative to fundamental values of corporations were underrated, even in August 1929, they concluded.

Could have fooled me. (And the entire market.) I’ll look over the paper later.

Posted by Eddy Elfenbein on August 20th, 2007 at 11:01 am

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