Demography and the long run predictability of the stock market,” Cowles Foundation Discussion Paper 1380

THE SECULAR MOVEMENT OF the U.S. stock market in the postwar period has been characterized by three distinct twenty-year episodes of sustained increases or decreases in real stock prices: the bull market of 1945–66, the subsequent bear market of the 1970s and early 1980s, and the bull market of the middle and late 1980s and the 1990s. Explanations of the most recent and spectacular bull market have typically been based on several factors:1 the advent of a “new economy ” in which innovations create a permanently higher rate of economic growth and an accompanying increase in the intangible capital of the corporate sector;2 the substantial increase in participation in the market; and the apparent decrease in risk aversion of the baby-boom generation.3 Similar arguments, based on the “new economy ” created by the technical innovations of the immediat