Observations on Samuelson’s Dictum

The stock market in the form of the S&P 500 is estimated to be inefficient in 13%to 30%of the time since 1963.This is contrary to the theory of efficient capital markets,but in accordance with Samuelson’s Dictum,which posits that the stock market is micro efficient,but macro inefficient.I develop a new model to measure potential inefficiency at macro level.Inefficiency in price(P)is driven by earnings(EPS)and/or valuation(P/E).At the peak of the TMT-bubble in 1999/2000,both factors were in play,while only earnings assumptions were inefficient before the Great Financial Crisis in 2008/09.The model developed show expected results in terms of relative efficiency for Developed vs.Emerging Markets and for Dow Jones vs.Nasdaq.Parts of academia seems to accept a different definition of market efficiency at micro level compared to macro level.At macro level,a standard“price vs.fair value”definition seems to be generally accepted,while at micro level,a relative“price vs.price”definition seems to be broadly used.The latter way of thinking has historically contributed to price bubbles.Numerous examples of stock prices that deviate significantly from their fair value in days,weeks and months and doubtful methods for measuring efficiency at micro level cast doubt about the micro efficiency claim part of Samuelson’s Dictum.

Deflation and Stock Prices

While the literature on inflation and stock prices is plentiful,there is little literature on deflation and stock prices.This paper explores the empirical data and makes a theoretical analysis of the likely impact on stock prices when expectations change from inflation to deflation.Deflation has a bad name among some economists and most investors.However,from a stock market perspective,deflations’bad name may not be well-deserved.Several observations support this:1)The 1930s was a statistical outlier and not representative for a deflationary period and deflation does not seem to create recessions,causality goes the other way;2)real stock returns are positive and around average in the periods leading up to and following the onset of deflation;3)when moving from low inflation to mild deflation,P/E ratios are virtually unchanged;and 4)peak P/E ratios seem to be reached at inflation rates close to zero.The author proposes three possible explanations for the seemingly disconnect between the empirical data and the“default”ex ante belief of most economists and investors:availability heurist,deflation illusion,and tax related issues in connection with the tax hypothesis.