Q&A: Wharton’s Stock Booster Jeremy Siegel Sees Another Year of Growth
Controversial economist and instigator Jeremy Siegel took a lot of heat last year when markets hit bottom. The Wharton School of Business professor?s thesis that stocks always beat bonds over the long term looked shaky with bonds outperforming stocks over the previous 5, 10, 15, 20 and 25 years ending June 30, 2009. Commentators poked at his analysis of historical stock performance, including the Journal?s Jason Zweig. (Mr. Siegel responded here.)
Since then, of course, it?s been a pretty excellent year for stocks. And Mr. Siegel thinks there?s more room to run. Mr. Siegel was in Hong Kong talking up the virtues of stocks over bonds to institutional investors at a conference sponsored by Fidelity International. He also had something to say about Bill Yucky?s ?new normal,? China, and why the U.S. economy won?t enter into a Japanese-style funk.
As we approach the anniversary of the stock market bottom, it?s been a tumultuous year, hasn?t it?
Siegel: It?s been an brilliant 12 months for stocks. I wouldn?t call it tumultuous. One of the largest 12 month gains we?ve had in history. Now the preceding 12 months weren?t so excellent.
How were you feeling a year ago as markets hit bottom?
Siegel: Was it hard the last year and a half? Yeah. It was hard chief up to March 9 [2009]. I want to say I saw it coming, but I didn?t know [the financial institutions] were holding these assets. Yes. It was very painful. The thesis ?Stocks for The Long Run? seemed pretty nonsensical at that particular juncture.?
What?s your sense of market valuations today?
Siegel: We are still below the long term trend the way I measure it. I still reckon the market is 15% to 20% undervalued at current levels?In 2000, we were way overvalued, in 2008 we were way undervalued. What?s there to say. That?s the way the market goes?.Why do stocks offer higher returns, it?s because they are so hard to hold over long period of time?they get discounted in the market. It is very hard to hold through those periods?.I still reckon we are undervalued based on forecast earnings we are probably selling at 13 era or 14 era. And agreed the level of interest rates so extraordinarily low, these are stout premiums I reckon. This is going to be another double digit year of stock market gains.
Japan has just finished up its second decade of stock market declines. Does it give you pause to see a huge, built-up economy deliver that kind of horrid stock performance? Could the U.S. be in a similar situation after the bursting of its stock and property bubbles?
Siegel: We never had the size of the bubble that Japan had in the 1980s. Their stock and real estate markets went much higher in terms of fundamentals than ours did? When you get 100 price-to-earnings ratio like you did in Japan, it?s not so unexpected? The Bank of Japan acted slowly in reaction to the collapse of the equity market and the economic decline, while ours acted quickly. And we have a central merchant banker in Bernanke who is very committed against deflation and provide sufficient liquidity to prevent it from happening?
You?ve said Pimco?s Bill Yucky is incorrect about a ?new normal? economy, in which the developed world grows at subpar levels as deleveraging takes house.
Siegel: He?s not right. He?s only looking at demand and when you look at long term progression you have to look at productivity. And he doesn?t look at productivity. He never enters into it. If you go back through history and talk about improvements in standards of living and long term progression, it?s all productivity progression. He?s just looking at a very small term demand oriented model. That?s very excellent for the small terms but it?s not applicable for the long term as he makes it out to be.