Wharton Professor Jeremy Siegel says he thinks fair market value of the Dow Jones Industrial Average is about 20,000, meaning that the index is close to 10% undervalued right now.
Wharton professor Jeremy Siegel proved to be right on with his prediction about the Dow Jones Industrial Average hitting 18,000 by the end of 2014. Now, heading into 2015, Siegel says stocks will have a tougher go of it.
Does the recent market turmoil mean the bull market is ending? Jeremy Siegel doesn’t think so, even if the Federal Reserve starts raising interest rates sooner than previously expected.
Over the past five years, stock returns have been well above their long term average. But over the last ten years, they remain below the average. So what does Wharton professor and Stocks For The Long Run author Jeremy Siegel think is in store going forward? More gains, though the seas could be choppy.
While stocks have stumbled out of the gate in 2014, Wharton’s Jeremy Siegel doesn’t think the declines are a sign that the bull market is ending. “While I still think there’s a push in the markets, I still don’t think the public is back,” Siegel told CNBC. “I mean they’re tiptoeing in, but when you look at the flows into the equity funds, it’s not there. … We have to bring them much more in until we get to the top of a bull market.” Siegel says his fair value estimate for The Dow Jones Industrial Average is 18,000-18,500, which is about 10% to 15% above current levels. Siegel also talked about interest rates and whether increased borrowing could lead to a jump in the velocity of money, and inflation. “Short-term rates are going to stay near zero, that’s going to keep that velocity down,” he said. “We really have to push the economy and inflation to get the velocity up. It’s not happening soon.”
In March 2009, Barron’s began a series of articles on long term stock performance, with one of the main conclusions being that when stocks have below average returns over a 5- or 10-year period, they tend to then bounce back with strong performance over the next 5 to 10 years.
The past four years-plus have made that finding sound prophetic, with stocks surging back after the “lost decade”. And now, Barron’s says, they are priced for 9% annualized returns over the next five years.
The estimate comes out of data from Wharton Professor Jeremy Siegel, and shows that the average annual return for stocks since 1871 has been 8.84% (6.66% after inflation), according to Barron’s. “Negative [returns] for both the five- and 10-year intervals occurred through the close of 2008,” Barron’s Gene Epstein writes. “But as of the past November’s close, the 10-year less-one-month has scored an average annual return of 8.36%, about in line with the median; and the five-year less-one-month — marked to the close of 2008 and near the market lows — has racked an average annual return of 19.26%.” The latter is far above the long term average, but Epstein says that doesn’t mean the next five years will be bad for stocks. “The five-year stretch is also part of the 10 years beginning in early 2009, and the historical patterns indicate that those 10 years should run above average, he says. “So while the next five years are unlikely to be as stellar as the previous five, median returns between now and late-2018 are still quite possible.”