The Park Place Economist


Through my research design, I will derive a trend of the average price of the S&P 500 for the past 100 years. This trend will be a representation of the fundamental valuation of the stock market. Previous studies suggest the S&P 500 should trend upward at 6-7% per year (Lynch 1989). Then, I analyze the deviation from this trend during the mid-1980s bubble and the technology bubble of the late 1990s. I run a regression using consumer confidence and sentiment indices. My modified hypothesis is that the deviation of actual S&P 500 prices from predicted “fundamental” S&P 500 prices during the years 1985- 2001 is started by changes in consumer confidence and consumer sentiment. If the variables explain a lot of the deviation, then the herd mentality theory predicts the creation and destruction of bubbles.