Jeremy Siegel’s Predictions for 2018

Jeremy Siegel almost never gives a one-year forecast for stocks, but last week he predicted that U.S. equities will end the year with gains of as much as 10%. That may seem meager for investors who have benefited from double-digit gains in seven of the last nine years, but Siegel said this year will be far better for stocks than it will be for bonds.

Siegel is the Russell E. Palmer professor of finance at the Wharton School of the University of Pennsylvania in Philadelphia and author of the book, Stocks for the Long Run, originally published in 1994 and now in its fifth edition. He spoke on Thursday at the TD Ameritrade LINC conference for advisors in Orlando, FL.

Siegel has been unabashedly bullish on stocks during the post-crisis period and, unlike those analysts who have warned of overvaluation, his predictions have been vindicated. Indeed, he said that his 2018 forecast was the most bullish of those recently appearing on CNBC. Despite losses last week, stocks have gained approximately 5.6% this year, so he is poised to continue that record.

He provided some context for his bullish outlook based on the long-term performance of stocks versus other major asset classes.

Going back to 215 years to 1802, Siegel showed the degree to which stocks have outperformed bonds, bills, gold and the dollar itself. “Over the long run it is the most stable asset,” he said. “It’s not really a random walk. It is mean reversion.”

He said that stocks have returned 6.8% annually on a real basis, implying that they double every 10 years. Those returns have been very constant, he said, even over various sub-periods. Bonds have returned 3.5%, bills 2.6%, gold 0.5% and the dollar -1.5%.

Inflation, he said, has been evident only since World War II and has not hurt stock returns. “That should be the case because they are real assets,” he said.

Siegel presented data going back 115 years on international stocks based in U.S. dollars. In every country in the world, he said stocks “slaughtered” fixed income. The U.S. equity market is number three; number one is South Africa, because it had the lowest starting P/E ratio. Across the world, stocks have returned 5% to 5.5%, he said.