| This dissertation approaches the valuation of the US stock market from two angles. The first study "Survey-Based Confidence Indices and US Stock Market Data" builds on the Investor Behavior Project, a survey-effort that has been initiated by my dissertation director Professor Robert Shiller in the late 1980s and is now administered by the Yale International Center for Finance. For both a sample of wealthy individual investors and a sample of institutional investors, it quantifies respondents' perceptions of the US stock market through four confidence indices. Starting from the raw sample of the underlying survey-responses, the study evaluates the viability of the index methodologies and redefines the indices accordingly. The indices hereby extend from 1994 in the case of the institutional sample and 1999 in the case of the individual sample until the year 2012. I compare the indices not only within and across the two survey samples under consideration, but also embed them within the context of other confidence/sentiment variables. It thereby becomes apparent that the four different indices capture genuinely different facets of market participants' confidence. A binary choice analysis performed not at the index- but at the survey-level underscores this evidence and reveals the variation in determinants of the different confidence indices. Subsequently, the attention of the study turns to the feedback channel between the confidence indices and returns of a variety of market indices, capturing different levels of market capitalization and the distinction between value and growth. Granger-causality tests in conjunction with a correlation analysis reveal the role that past medium-term returns play for two of the confidence indices, but importantly in a contrarian manner. When complementing these tests by a portfolio-sort study as well as by a predictive regression specification, the individual Valuation Confidence Index, measuring the fraction of respondents that perceive stock prices in the United States - relative to true fundamental or sensible investment value - as too low or about right, surfaces as a significant, non-contrarian predictor of the large-cap segment of the US market over a three-month horizon. Finally, the study investigates the relation between the survey-based confidence indices and valuation ratios of market indices. It establishes a sizeably strong relation and even provides insights into the prediction of levels of the ratios from current confidence.;The second study "Changing Times, Changing Values: A Historical Analysis of Sectors within the US Stock Market 1872-2013," which is co-authored with my dissertation director, takes a long-term historic perspective on the valuation of the US stock market and breaks down its valuation into the sectors Industrials, Utilities, and Railroads. For this purpose, 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. The CAPE ratio, whose basic idea goes back to the 1930s and which has first been formally defined at the end of the 1980s, makes a long-term value assessment by normalizing the current price by a ten-year average of earnings. As part of our analysis, we define a methodological improvement to this ratio to not only make it robust to inflationary changes, but also to changes in corporate payout policy. We then update original evidence about the predictive impact of the CAPE ratio for the overall US stock market and extend this evidence to the three aforementioned sectors individually. In this context, we can clearly attribute the mean-reverting nature of the valuation ratio to movements in the price and reject the notion that earnings fluctuations bring the ratio back to its mean, contrary to the predictions of the Efficient Markets Hypothesis. 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. |
