Siegel: Rates Won’t Rise As Much As Feared

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.
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The Moving Average Strategy: Good Results — If You Have The Discipline

Does a 200-day moving average strategy work over the long term? In recent commentary for the American Association of Individual Investors, AAII Journal Editor Charles Rotblut takes a look at the question, using data from Wharton Professor Jeremy Siegel.

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Siegel: Stocks 10% to 15% Below Fair Value

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.”

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9% Returns Ahead for Stocks?

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.

Validea’s Benjamin Graham-based portfolio is up 15.6% annualized since its 2003 inception, nearly tripling the S&P 500.

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.”

Siegel: S&P Fair Value around 2,000

Wharton professor and author Jeremy Siegel says stocks remain attractively valued, particularly given interest rate levels.

“We are still at extremely normal, average valuations and, in fact, low valuations, given the interest-rate environment and even the anticipated rise in interest rates,” Siegel said at a CFA Institute Conference, MarketWatch reports. He said that historically, when interest rates have been below 8%, price/earnings ratios have averaged about 19. Given current S&P earnings, that would put the index’s fair value over 2,000, about 10% to 13% above current levels.

One area that Siegel says looks very undervalued: the tech sector. It trades at a P/E of 13, “one of the cheapest [levels] it’s ever been relative to the rest of the market,” he said. “We’re used to seeing it at 25.”

Siegel: Stocks Still Look Good

Author and Wharton Professor Jeremy Siegel says it is still a “very favorable climate” for equities. Siegel tells CNBC that a lack of major economic uncertainties should continue to push the market higher through the end of the year. He sees the Dow Jones Industrial Average ending 2013 between 16,000 and 17,000. He also sees GDP growth accelerating next year to 3 to 3.5%. Siegel does say he thinks people may be overly bullish on Europe’s recovery, but doesn’t think Europe will hamper the U.S. economy.

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Shiller Talks Valuations, Counters Siegel

Yale Economist Robert Shiller says the market looks overpriced, but not so much so that you should avoid stocks.

“I’m not really saying don’t invest in stocks,” Shiller tells CNBC’s Futures Now. “[But] don’t expect miracles. He says the market’s valuation looks “high by historical standards, but it’s not super-high. I’d say it’s suggesting — based on historical evidence — real returns of something like 3 percent a year for the next decade.”

Shiller also counters Wharton Professor Jeremy Siegel, who recently criticized the use of the 10-year cyclically adjusted price/earnings ratio — Shiller’s preferred valuation metric. “He’s a smart guy, he makes good points, Shiller says. “He tends to be a little bullish, I think. But the measure that he uses is going quite far from traditional price-to-[earnings ratios]. He is proposing a national income and product account definition of earnings, rather than earnings that correspond to the stocks in the S&P 500. And even if you take that, suppose we accept that, then the market is still not low-priced!”

What Keeps Siegel Up At Night

In a column for Kiplinger’s, the bullish Jeremy Siegel talks about what he sees as threats to his upbeat outlook.

Siegel cites a couple risks whose impacts would go far beyond the market: terrorism and pandemics. But another of his concerns is more economic. “One risk I did not note earlier was the country’s poor growth in productivity, which measures the output of the economy per hour worked and determines the standard of living,” Siegel says. “Productivity growth averaged only 0.6% in 2011 and 0.7% in 2012, with the first half of 2013 not much better. That’s considerably below the 2% average the economy has recorded since 1970.”

Siegel offers a couple possible explanations for the productivity slowdown. “The fall in U.S. educational achievement could be one cause, as well as the long periods of unemployment many Americans have experienced as a result of the recession,” he says, but adds, “I still believe we will emerge from the slow growth in productivity. Nevertheless, it’s crimping corporate profits.”

Siegel Sees Win-Win for Stocks

Author and Wharton professor Jeremy Siegel has taken a lot of heat for his bullish predictions over the past couple years. But he’s largely been on the money — and now he says the bull has more room to run. 

Siegel tells CNBC that he thinks the Dow Jones Industrial Average will be in the 16,000 to 17,000 range by year-end, and he thinks 18,000 is “definitely achievable” in 2014. “The market is totally spooked by whether [quantitative easing] continues or not,” Siegel said, but he doesn’t think it should be. The Federal Reserve “would never accelerate tapering unless the economy was so much stronger, which has got to be good for earnings,” he says. “So in one way, you can’t lose on stocks — either the economy’s weak, the tapering will end; or the economy’s strong, they’ll taper, and earnings will be strong. That’s why I think stocks are still a win-win situation.”

Siegel also says valuations remain reasonable. “Equities’ valuation right now is just about at its historical average, but one has to realize that that’s the average of when interest rates were as high as 15 and 20 percent, and as low as they are today,” he said. “When you’re in a low or moderate interest rate environment, price-to-earnings ratios of 18 and 19 are actually more typical — and we’re not there yet.”

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Siegel: Taper Already Baked Into Stocks

Wharton professor and author Jeremy Siegel thinks the Federal Reserve will begin tapering its bond-buying program in September, and he thinks the move is already baked into stock prices. Siegel tells Bloomberg that unless the tapering accelerates quicker than expected, the bull market should continue. He stressed that the start of tapering doesn’t mean a dramatic cut to the stimulus the Fed is providing, and says he expects 2.5% to 3% GDP growth for the U.S. in the third quarter.

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