The stock market dropped last week, leading to questions and debates as to the underlying reasons. We review economists’ views on the issue.
John Cochrane has a long explanatory post on “stock gyrations”, where he examines in depth stock prices, price dividend ratio, rates, risk premium and volatility. The question before us is, are long-term real rates finally rising – back to something like the historical norm that held for centuries – and if so why? The good story, Cochrane argues, is that we are entering a period of higher growth. This would raise real growth, with a small stock price decline, but higher stock returns and bond returns going forward. The bad story is that, having passed a tax cut that left untouched will lead to trillion-dollar deficits, congressional leaders justRead More »