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.
Siegel was not overly concerned about inflated equity valuations.
The average P/E ratio for the S&P since World War II has been 17.02, he said. Now it is slightly greater, about 21-22. He said there have been sub-10 P/E ratios only when there was double-digit inflation. P/E ratios are normally 18-20 when rates are low, as they are now, according to Siegel. The highest P/E was 30 in March 2000, when the technology sector had a P/E ratio of 90. The rest of the market was at 20, he said. The P/E of the NASDAQ was 600 at the peak of the dot-com bubble, he said, adding that bitcoin is in a similar bubble and will meet a similar fate.
“I don’t believe that stock prices are driven by quantitative easing (QE),” he said, or their gains would have reversed during once the Fed began shrinking its balance sheet last year. “They are really driven by earnings and interest rates.”
Siegel distinguished between frim-reported earnings (which he said are the most liberal, because companies can include or exclude what they want), S&P operating or “core” earnings (where companies can expense certain things like pension costs) and GAAP or reported earnings (which are the most conservative, because it requires assets to be written down, which he said is overly conservative). Siegel uses S&P operating earnings for his analysis.
Read the full article here by Robert Huebscher, Advisor Perspectives