Jeremy Siegel on Why Stocks are 'Extremely Attractive'
Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a Senior Investment Strategy Advisor to Wisdom Tree Funds. His book, Stocks for the Long Run, now in its fourth edition, is widely recognized as one of the best books on investing. It is available via the link below. He is a regular columnist for Yahoo Finance and is frequently quoted in the financial press.
I spoke with Professor Siegel on November 21.
We spoke last year on November 9th when the S&P was at 1,223. Today it closed at 1,192. You had forecast 10% to 20% gains last year. What surprised you, and what does that tell you about where the market is valued today?
From November 11, 2010 through today, the return on the S&P has been a half a percent, even with the big drop today. So it has basically been zero.
There are two overwhelming reasons why my projection did not turn out. One was a much-slower-than-expected and disappointing recovery in the economy. The second was the euro crisis, which is getting worse and is a big depressant on the world markets right now.
My estimate of the earnings has been quite good. Earnings continue to rise, so it isn't an earnings shortfall, because it looks like the earnings this year are going to be even higher than last year.
The market is still extremely attractive and, in fact, more attractive given that interest rates are much lower.
In a way, with the stock market really doing nothing and 10-year Treasury rate going from just under 3% to under 2%, we have a more attractive equity market relative to bonds.
The equity premium today, which is the difference in expected return on stocks and bonds, is more than twice its historical average. The historical average has been 3% to 4%, and right now the expected return on stocks after inflation is around 8% given current P/E ratios. For bonds, real returns are about zero for the 10-year.
You've got a very, very large gap between bonds and stocks.
To what extent do you think the market has priced in fears from the euro zone, and what scenarios with respect to the euro zone would cause the market to move up or down?
Any big bold move on the part of the ECB would bring about a huge rally in equities. The ECB is not coming up big like it must. The ECB will ease eventually as the economy – even in Germany – slows down and pressure develops from Germany. The ECB needs to lower their interest rates. They need to lower the euro. Both those things are definitely going to happen.