A very interesting article is available online from Atlantic Monthly at http://www.theAtlantic.com/atlantic/issues/current/9909dow.htm. (The article is in three parts, and the 2nd and 3rd parts are the more informative sections.)
The authors analyze stock market prices using basic techniques of expected income stream and also risk premiums, and conclude that stocks are actually extremely UNDERvalued today (and always have been). By their model the Dow ought to be running at 36,000 or even more.
The reasoning is a bit similar in flavor to, but far more sophisticated than, a posting I made to the Extropians list in 1997, at http://www.lucifer.com/exi-lists/extropians.1Q97/0072.html, where I suggested that stocks should have infinitely high valuations.
My reasoning may not have been quite right, but this new analysis does
suggest that investors are underestimating future growth possibilities.
And in a way they are being conservative. They assume that growth will
tail off after 50 years (apparently in order to avoid deriving my result
of infinite valuations). If we instead factor in the possibility for
tremendous future INCREASES in growth due to the new technologies we
often talk about, then even DJIA 36,000 looks small.
I'd like to hear what our more economically sophisticated members think
of this argument.
Hal