Jeremy Siegel: Stocks Could Rise 10% In 2016 by [email protected]
Wharton finance professor Jeremy Siegel thinks the odds are good that major U.S. stock market indexes will rise 10% in 2016, following last year’s flat performance. The recent plummet in China’s stock market will not hold the U.S. back longer term, Siegel notes. He expects GDP growth of 2%-2.5% in the U.S., and believes the Fed will increase interest rates only about twice in 2016, versus the three or four times projected by many analysts. Thus, modest interest rates, along with rebounding corporate earnings, should underpin U.S. equities. In this [email protected] interview, Siegel also discusses U.S. labor markets, productivity and absent wage increases, problems in the junk bond market, and the risks of worldwide deflation and recession.
An edited transcript of the conversation follows.
[email protected]: We’re speaking today with Jeremy Siegel, a Wharton finance professor, about the outlook for markets in 2015. Welcome, Jeremy. Thank you for joining us.
Jeremy Siegel: Happy to be here, and happy New Year.
[email protected]: Happy New Year to you as well.
Siegel: Although not so happy in the stock market today [Monday, January 4, 2016].
[email protected]: Let’s talk about a couple of things. One is that 2015 was the worst for stock markets since 2008. The Dow Jones and S&P 500 indexes … lost a little bit, but basically they were flat. That is the lowest performance in quite a while. Where [do] you see them going in 2016? We have these issues in China, [with] suspension of trading, [and] and a drop of 7% in the stock market there. These are all connected. Let’s talk about the short term, and then we can talk about the long term.
Jeremy Siegel: One thing is interesting: The worst in what — six or seven years, and that’s a flat market? That’s not bad, right? It shows how many up-markets we have had over the last seven years, and the worst is a slight negative on the index. If you add the dividend return, it’s actually a very slight positive. The major reason for that is we had a tremendous drop in earnings. Unexpected, both the rise of the Dow [at the time] and the collapse of the energy prices. The earnings were way, way below estimates. It is not a bad stock market performance given the decline in earnings that we had.
[email protected]: The projections are that earnings in the upcoming reports aren’t going to be great either, and that we have this wrinkle, large or small, with China at the moment. What do you see? It’s a tough call for 2016.
Jeremy Siegel: Let’s get to the real short run. The China [aspect] — a circuit breaker at 5% for a volatile market is way too small. There [are] also fears that there is a big lockup — they prevented insiders from selling stocks for six months. That’s going to end on Friday. Whenever something bad happens [people feel], ‘Oh my God, there’s going to be millions of shares sold on Friday,’ and ‘Get out now before the circuit breakers come in.’ It’s a mess. We all know that they’ve handled the market really badly. It’s an important market of the world, and that certainly contributed to the declines we saw today.
[email protected]: Do you think the situation in China is not quite as bad as the market suggests today, and that technical things are making it overshoot on the downside?
Jeremy Siegel: The market always overreacts. How much will GDP go up? I heard on CNBC some forecaster saying it will be as low as 2-3% for this year, which would be a shock. But most of the people that I talk to … say maybe it’s 5%. That’s a comedown, but still not a disaster. We wish we could get anywhere near that figure.
[email protected]: Let’s look in to the first quarter [and] first half.
Jeremy Siegel: The whole year.
[email protected]: The whole year. What are you seeing?
Jeremy Siegel: There’s a lot of pessimism now. If you take a look at bulls and bears, there’s a lot of downbeat on the market. I don’t think it’s going to be as downbeat. First of all, I don’t think the Fed is going to tighten as much as many observers fear right now. A lot of people [are] calling for four “tightenings,” and some even think more. I don’t think so. I think it’s going to be two “tightenings” — around that level. That is going to be a positive in the market, once they realize, ‘Oh my goodness, the Fed is not going to tighten that much.’ Hey, at that particular point, you look at the valuations of stocks. Even though they’re high from a historical basis, they are not high relative to current and prospective interest rates, and that realization will bring some money back into equities this year.
“With the earnings increase, and fears being allayed on how aggressive the Fed is, we would be at the same price-earnings ratio for a 10% move in the market this year.”
[email protected]: Where would you see the indexes at the end of the year?
Jeremy Siegel: We can do 10% this year.?Twitter Again, we were flat last year. I think our earnings are going to rise about 10%, [and] bounce back from about the 7% drop that we had this year. With the earnings increase, and fears being allayed on how aggressive the Fed is, we would be at the same price-earnings ratio for a 10% move in the market this year.
[email protected]: What do you see as the major positives and the major threats to the U.S. economy for 2016?
Jeremy Siegel: The positives are: I don’t think interest rates are going to be a threat. In fact, they are going to be less of a threat than many people think. That is going to turn out on the positive side. Earnings are going to recover. We had a tremendous decline in particularly energy-earning sectors, and they’re going to recover. The threats are, my goodness, there are still people calling for $20 [a barrel] oil.
A drop in oil prices is good, net for the U.S. economy, although not as good as it used to be, because we are almost balanced in terms of imports and exports, with our tremendous increase in shale oil production over the last five years. But nonetheless, the S&P 500 is not just a U.S. index. It is way more heavily weighted towards energy — the manufacturing companies that supply the energy. Companies like Caterpillar and others with all of the drilling equipment and all of that, are definitely hurt and marking down.
Also the fact that the strong dollar, although it helps us in terms of imports, it is very challenging for those companies that sell abroad and bring back euros and yen that are worth less in dollars. That is another reason for the hit in earnings. So again, oil prices [going] down is not going to be good for the earnings of the S&P 500 even though it is not going to have a big negative effect on U.S. consumers.
[email protected]: How about places like in