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 fifth edition, is widely recognized as one of the best books on investing. It is available via the link on this page. He is a “Market Master” on CNBC and regularly appears on Bloomberg, NPR, CNN and other national and international networks
This is my 13th annual interview with Jeremy, which we do just before Thanksgiving. He has been one of the most prescient forecasters among those featured in Advisor Perspectives. You can access our prior interviews here: 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008
I spoke with Jeremy on Thursday, November 19th.
When we spoke a year ago, the S&P was at 3,119. This morning it was at 3,562. That's a gain of 14.2%. Last year you said the market was fairly valued; despite that it went up nicely. What are you seeing in the market’s valuation?
We have to marvel at how well the market’s done despite the recession and COVID crisis. I appeared on the networks in June to say that the Fed’s huge provision of liquidity, supported by the government's CARES Act, would be very positive for the equity market. I looked at the growth of the money supply and I said, “This liquidity is going to go first into assets and then, in 2021, when the vaccine comes, into the economy.” We know that stocks are the longest-lived assets – and they are anticipating a great 2021. I predict the bull market will continue next year. Stocks are not overpriced.
As you mentioned, the economy was helped significantly by fiscal and monetary support. Do you expect further support and if not, what does that say about economic growth?
It's a big disappointment that there was not a second round of fiscal support. Before the election there was political positioning between Pelosi, Trump and other Republicans, when the virus was relatively quiescent. Had they known the surge we're getting now, maybe they would have come to some deal. I'm not going to give up hope, although I think it's a long shot that we will have something before January.
That said, we can survive it. It will mean slower growth in the fourth quarter. It may mean a slight dip in GDP growth. But again, that does not mean that 2021 won't be strong. I'm very encouraged by the vaccine results that we have seen and this strengthen the case for a robust 2021.
Looking even further, what do you see will be the permanent, secular changes that we should expect in the economy?
The pandemic accelerated trends that were in place, but it also started new trends. Obviously, the trends towards the decline in traditional retail and the surge of online buying were accelerated. But the ease with which so many people, white-collar workers in particular, can work at home, has caused us to rethink office-space requirements and the amount of time people need to spend commuting, getting to and from their offices. Office space is going to be challenged for a long time. I also think that business travel is going to be down for an extended period.
In fact, the market for commercial real estate may never recover, as people realize that they can do effective Zoom meetings far easier than they can travel somewhere. Those are permanent changes. However, I believe leisure travel will come back completely. Theme parks will come back; restaurants will come back, although not the same ones. But Business travel and office buildings will be permanently down.
Do you see a trend in movement out of cities and into suburbs?
We see that now, but I am not sure in the long run. There are positive and negatives for cities. If people don't have to commute, then the reason for some people to live in the city is reduced. . However, the arts, museums and live theaters will come back. Broadway will come back. Live theater, ballet, orchestras and opera cannot be as effectively rebroadcast through television as movies and these events will come back. However, movie theaters may not come back because of Netflix and in home services. They were already dying, except for showing blockbusters.
I believe that second homes will become very popular. Many will have a home in or near the city and also in places where they enjoy being – the mountains, shore, rivers or lakes. We're in a boom for second homes that I think has legs.
Overall, the market has reacted strongly to the election of Biden and Harris. Will that change if the Democrats manage to win both seats in the Georgia Senate race?
Based on the betting odds – and they've been pretty accurate (as opposed to polls) – that outcome is not impossible, but very unlikely. The odds are now about four-to-one against that happening. I have a hard time believing that the Republicans can't take one of those two seats. But even if the Democrats prevail, some very conservative Democrats, like Joe Manchin of West Virginia, have already announced that they are not going to vote for the more radical agenda of the Democrats (such as packing the Senate).
However, if the Democrats manage to get to 50 seats, I believe there will be a Dem tax plan. But it'll be sharply scaled down from what Biden has propounded on the campaign, which would have resulted in a very sharp increase in taxes.
If the Dems take both Georgia senate seats, there may initially be a minor dip in stocks, but in that case there will be a lot more stimulus and money that's going to flow from Washington. That's positive for the markets.
Either outcome would not derail the bull market I envision for 2021.
Turning to inflation and interest rates, the forces that have kept inflation low over the last decade or so are still in place. We have large fiscal deficits and a significant amount of private-sector indebtedness. We're still the reserve currency. But now we have a large output gap and we have high unemployment. Are you worried at all about inflation?
It's a very good question, but I disagree with the premise that fiscal deficits and private-sector debt keep inflation low. We are a reserve currency and that does support the dollar to some extent. But we will see much more significant inflation for the next few years than we have seen over the last two decades. I'm talking about 3%, 4% or 5% inflation each year – inflation that is well above the Fed's target of 2%. This is because since the Pandemic last March, we have seen the largest increase in the money supply since World War II.
The Fed will be very slow to clamp down on this inflation, because unemployment is going to stay relatively high. A lot of firms are not going to hire back the workers they let go. They've learned to live without them. These newly-unemployed need to be retrained. The Fed will keep the short rate extremely low for a long time to keep demand high. However, interest rates and inflation will rise. We're not going to have double-digit or even high single-digit inflation. But I would not be surprised to see 3% to 5% inflation over the next several years.
When we spoke last year, the 10-year yield was 1.75%. Today it's 86 basis points – almost 100 basis points lower. Why are yields so low? What does that say about our economic outlook? What direction do you think rates will take in the coming year?
As time goes on, I'm have become even more convinced that low rates are not caused by central banks keeping the short rate very low. There are very strong real economic forces that are keeping record low rates, and I noted these last year. Demographics, aging populations, longer life expectancy, more saving, high risk aversion are among those factors that drive investors to bonds. Also, bonds have become the hedge asset of choice for short-term managers to cushion equity risk. Treasury securities usually jump in price when equities fall. All these factors are going to be with us for a long time.
That said, I see rising long-term bond rates because of my inflation forecast. I expect interest rates to go back to 1.75% at least by the end of next year and reach the 2% range by 2022.
Is the multi-decade bull market in bonds over?
I strongly believe the 40-year bull market in bonds, which started in 1981 with the 10-year yield at over 16%, has ended. We will never in our lifetime, and maybe our children's lifetime, see long-term Treasury yields as low as we saw them this year. I see higher inflation and stronger economic growth that spells the end of this long bull market.
By the way, the bull market in bonds was the longest bull market of any major asset class in world history. It had interruptions, but we went from 16% to 0.5% in 39 years. But I believe this year we hit bottom.
Turning to trade, our relationship with China is pivotal to the U.S. and global growth outlook. What direction do you expect the Biden administration to take with respect to China, particularly in regard to the issue of curbing intellectual property theft and with respect to the many tariffs that were imposed under the Trump administration?
I expect a much more multilateral approach to trade policy under Biden rather than the go-it-alone policies of Trump. And I think that's what Biden should do. I hope he will attempt to get together with other countries in a concerted effort to boycott or sanction those Chinese firms that violate intellectual property rights and conventions. That is likely to be more productive than the negotiations that Trump pursued.
I do not believe that we're going to get tariffs imposed against Canada and Europe the way we did under Trump, which were largely counterproductive. We're not going to join the Trans-Pacific Partnership (TPP), there’s too much opposition, even from the Democrats. But the multilateral, multinational approach will be the one that will be pursued by the Biden administration.
Let me ask about some of the asset classes or sectors that you think are attractive or that you want to avoid. Let's start with emerging markets, which last year you were very positive on.
Admittedly, they have not done well. But next year I think the situation is much different. I expect a weaker dollar will help emerging markets, because of their dollar indebtedness. I expect higher inflation, and that's good because many emerging markets export commodities and I expect prices of their exports to rise with the reopening of the economy. A lower dollar helps them here also. The fact that Emerging market valuations are so low – almost a record low relative to developed countries, particularly in the United States – will also be in their favor.
What about value versus growth?
I also thought value would finally outpace growth this year. But the pandemic was obviously a dream come true for growth and tech investors. These firms bridged the gap and were critical to maintaining commerce. But we'll get a substantial reopening of the economy by the middle of next year and a complete reopening by the end of the year. Value stocks will also benefit from investors searching for yield. I believe Value will outperform growth stocks in 2021.
What about ESG as an investment theme? Do you expect investors to have to sacrifice performance if they move towards an ESG or SRI portfolio?
Clearly any asset that gets overbought will suffer poor returns. I have not analyzed the ESG space and there's a lot of different definitions of ESG. Have they become overbought? I don't have a lot of evidence to answer that question. But I do know that young people love clean emissions, electric cars and renewable energy. They are very much into this and the other factors that could be called ESG. I believe that these investments will become increasingly popular
But investors must be very careful in this space. And one has to be careful since any assets that gains popularity has the risk of becoming overbought and therefore delivering low subsequent returns.
Are there any other asset classes that are particularly attractive?
Residential real estate is going to continue to do very well, because people are going to be searching for second homes, seeking more space and raw land. Commercial properties in the office area are going to suffer. Warehouses are going to be great because they house computers for the cloud and goods Amazon and other online retailers.
But one has to remember, as the vaccine becomes available, the pandemic will fade and people will restart their normal activities. There's a lot of pent up demand for theme parks, travel and cruises that will definitely come back in 2021.
You've presented a very positive outlook for the economy and the markets. What are the risks that worry you? Where are you most concerned about?
There are always bad, unexpected events that can pop up.
Let me tell me what happened earlier this year. On February 20, I travelled to Scottsdale to give my view of the markets and the economy before a large, sophisticated group of analysts. I asked, "What do you think will end this bull market?" I gave them six or seven choices, one of which one was the pandemic. Recall, this was just three or four weeks before the markets crashed and Covid 19 was already spreading around the world by the time of this meeting. But out of 100 of these analysis, only one said the next bear market will be caused by the pandemic. That shows how quickly something unforeseen can come upon us.
I've mentioned nuclear terrorism in the past. There are still bad actors and terrorists who could get a hold of a nuclear material and terrorize the world.
But I see tensions easing in the Middle East. Oil isn't as important as it once was and I don't see an oil crisis or other political crisis. I believe Trump will eventually concede the election without incident.
But remember, the unexpected can creep up on you mighty quickly!
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