This paper presents evidence of infrequent shifts, or "breaks," in the mean of the consumption-wealth variable cay_{t}, an asset market valuation ratio driven by fluctuations in stock market wealth relative to economic fundamentals. Conventional estimates of cay_{t}, which presume a constant mean, display increasing persistence over the sample. We introduce a Markov-switching version of cay_{t} that adjusts for infrequent shifts in its mean. The Markov-switching cay_{t}, denoted cay_{t}^{MS}, is less persistent and has superior forecasting power for excess stock market returns compared to the conventional estimate. Evidence from a Markov-switching VAR shows that these low frequency swings in post-war asset valuation are strongly associated with low frequency swings in the long-run expected value of the Federal Reserve's primary policy rate, with low expected values for the real federal funds rate associated with high asset valuations, and vice versa. By contrast, there is no evidence that the infrequent shifts to high asset valuations and low policy rates are associated with higher expected economic growth or lower economic uncertainty; indeed the opposite is true.
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