Today, I have the pleasure of catching up with my business school professor Jeremy Siegel, best-selling author of the investment classic “Stocks for the Long Run” in San Francisco. He has been teaching at the Wharton School for 42 amazing years now since Fall of 1976!
Here are my takeaways from his market outlook talk.
- US stocks are at “fair valuation” given low interest rates and low bond yield; non-US market valuation attractive but they have slower growth. Despite the short term risks of trade war and recession, he will stay invested in stocks.
- Stock is a bargain now compared to bond – The US stock market is trading at 18x P/E estimated 2019 operating earnings implying a real earning yield of 5.5% (1/18 or 7.5% nominal earning yield with 2% inflation). This 7.5% nominal yield represents a whopping 6% points premium over US Treasury bonds, well above the 3.5% historical average equity risk premium. In short, he is saying stock is a bargain now relative to bonds. This equity risk premium wasn’t always this high. Back in 2000, the premium was negative meaning stocks were yielding less than bonds.
- New normal for US market P/E – Siegel thinks that US P/E multiple warrants a new normal of around 18-20x, higher than historical average of 15x, because of virtually zero costs of indexing and trading, allowing investors to receive far superior risk return trade-off than before.
- Low interest rate worldwide – Low rates are not caused by Central Banks. They are driven by real economic forces including:
- Slow economic growth globally
- High private and regulatory demand for liquidity
- Increased risk aversion and higher saving of aging investors
- Negative beta of treasury bond prices with risk assets
- Professor Siegel gave an update on the historical total real returns of various asset classes from 1802 to June 2019:
- Stocks: 6.7% real
- Bonds: 3.5% real
- Gold: 0.6% real (not a good long term bet)
- Dollar Cash: -1.4% real (really bad idea to hold idle cash for a long time due to inflation)
The Bottom Line
The “Wizard of Wharton” – Jeremy Siegel recommends long term investors to stay invested in stocks despite the short term risks of trade war and recession.