Jeremy Siegel: Bear Market for Nasdaq; Correction for S&P

The Nasdaq will go into bear market territory and the S&P 500 will suffer a correction, according to Jeremy Siegel.

So far this year, the Nasdaq is down 14.5% and the S&P 500 is down 8.7%. A bear market is traditionally defined as a 20% decline and a correction as a 10% decline.

Siegel spoke to investors via a conference call hosted by WisdomTree Investments, where he serves as senior investment strategy advisor. He is the Russell E. Palmer Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania.

The market is also experiencing a rotation, he said, which will continue. That will hurt technology and other high-P/E stocks and will favor value stocks.

The double whammy for technology stocks are the higher discount rate and their moats. For example, Siegel said other streaming services could eat into Netflix’s market share. It is not clear whether firms like Netflix have a monopoly over technology, which is necessary to maintain their moats. Strong moats are necessary to maintain their lofty price-earnings multiples, he said.

“Bear markets take good stocks down along with the bad,” he said. “Only the good stocks come back.”

The sorting out is already taking place, Siegel said. The S&P minus the technology sector is down only about 4% since its all-time high.

A week ago, GMO’s Jeremy Grantham published a commentary that predicted a significant drop in U.S. equity prices.