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Back in 1979, two economists, Modigliani and Cohn, predicted that equities investors were undervaluing stocks because they were confusing nominal prices with real prices - "money illusion" - (real pricing takes into account inflation and what that does to the value of money). In effect, they predicted the big stock market bull run from the early eighties until the dot-bomb stock market crash that began in 2000.

Now, two other economists have reaffirmed that finding using market data and investor psychology. Cohen & Vuolteenaho of Harvard and Polk of Northwestern have published a paper outlining their view that stock prices go up during times of inflation.

With the Federal Reserve raising U.S. interest rates for the first time in 4 years this past week, a new era of inflation may be just around the corner. Time to buy the stock market? hmmm....

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