Jeremy Stein says (in my words) “Don’t try.” His words are
fundamentals only explain a small part of the variation in the prices of assets such as equities, long-term Treasury securities, and corporate bonds. The bulk of the variation comes from what finance academics call “changes in discount rates,” which is a fancy way of saying the non-fundamental stuff that we don’t understand very well–and which can include changes in either investor sentiment or risk aversion, price movements due to forced selling by either levered investors or convexity hedgers, and a variety of other effects that fall under the broad heading of internal market dynamics.
If true (and I believe it is), this is a very important statement. It implies that events are in the saddle and ride the Fed. Not the other way around.
Pointer from “G.I.” of The Economist blog, via Mark Thoma.
However, John Cochrane, an equally well regarded financial economist, appears to argue that it is possible to glean some information from market prices and dividends. Sounds odd coming from a Chicago guy! But worth reading:
http://faculty.chicagobooth.edu/john.cochrane/research/papers/Bubble_Bloomberg_Cochrane.pdf
also, older:
http://online.wsj.com/article/SB122645226692719401.html
You should have left a bit more in that quote, specifically, the fundamentals he’s talking about are not market fundamentals but “the policy fundamentals that the FOMC controls–the path of future short-term policy rates and the total stock of long-term securities that we ultimately plan to accumulate via our asset purchases.” I thought, from reading your quote, that he was making a broader point about market fundamentals vs sentiment and other market factors, but he was making a minor point that the Fed doesn’t control that much.
Ah, I see why, you got your quote from the linked blog at The Economist, which snips the quote in this misleading way, rather than from the original source that you linked to.