%0 Journal Article %A Robert A. Weigand %A Robert Irons %T Compression and Expansion of the Market P/E Ratio %B The Fed Model Explained %D 2008 %R 10.3905/joi.2008.701961 %J The Journal of Investing %P 55-64 %V 17 %N 1 %X Compression and expansion of the average market P/E ratio significantly affected U.S. equity returns in both the bear market of 1969–1981 and the bull market of 1982–1999. We compare two models of the market P/E ratio to determine which paradigm is most useful for financial analysts and portfolio strategists as they anticipate the future direction of the market P/E. We find that the “Fed Model” where investors benchmark the earnings yield on stocks to the 10-year T-note yield—provides a better description of how the market P/E ratio changes over time than the mean-reverting model posited by Campbell and Shiller [1998, 2001]. These results suggest that, as long as inflation and interest rates remain low, high market P/E ratios and the low expected return on equities that accompany high-P/E environments could persist for an extended periodTOPICS: Security analysis and valuation, in markets, financial crises and financial market history %U https://joi.pm-research.com/content/iijinvest/17/1/55.full.pdf