December 29, 2009
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.
We spoke with Professor Siegel on December 23.
We interviewed you on November 11 of last year, when the S&P was at 899, and you said stocks were “dirt cheap.” The S&P is now at 1,118, 24% higher. That turned out to be a very good call.
It’s actually over 30% higher since you published the article, a week later on November 18th.
I did not foresee that the first quarter of this year would be as disastrous as it was. We were just beginning to see how much global finance would grind to a halt. That just killed the world economy. We saw how potent that was when its full effect was felt in the first and second quarters of this year.
Since then, we have seen a substantial world recovery. Almost all countries moved to positive GDP growth in the third quarter. There were a couple of countries near zero growth. The fourth quarter looks positive for almost every country. That’s quite a comeback.
At the time of that interview, you said the fair value of the S&P was 1,380. What is the fair value of the S&P now?
Today, at current levels of interest rates – and if those rates persist – the fair value is fairly high – 1,300 or 1,350. I think interest rates are going to go up. That makes the fair value closer to 1,250 now.
I think that earnings growth next year will be stronger than anticipated and will break the all-time high for the S&P, which was in the second quarter of 2007, when earnings for the trailing 12 months were in the low 90s. In 2011 or 2012 we will break that amount. With $90 in earnings and a 15 P/E ratio, you get 1,350 for the S&P.That is a conservative P/E ratio. The long-term P/E should be higher, given a number of factors – for example, if interest rates don’t go too high. A P/E ratio of 15 covers a range of scenarios, including double-digit interest rates, which is when P/E ratios went to single digits. Take out those double-digit interest rates and you get P/E ratios closer to 18.
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