A recent article in Advisor Perspectives summarizes an interview with Wharton professor, Wisdom Tree senior investment strategy advisor and author Jeremy Siegel.
Here are highlights from Siegel’s comments:
- Valuations: While last year Siegel said that the market’s fair value was about 17- to 18-times earnings, he said “I’d notch that up a little bit because interest rates are much lower than they were a year ago, particularly long rates, which are so important for equity valuation.” Based on 2019 data, he said the market is selling at about 19 times earnings.
- Recession: Siegel said, “I am a bit more confident that we will avoid a recession over the next two years than I was last year. But there are definitely rocky shoals that we have to maneuver.”
- Market risks: The two biggest threats to the economy, in Siegel’s opinion, are an “all-out trade war” and a “Democratic sweep that includes not only the presidency but the Senate.” He believes that trade war concerns are weighing heavily on the stock market and economy: “As I said last year, the market wants a trade deal. It would love a ‘great deal’, but it will happily accept any deal. It does not want trade disruption.”
- Interest rates: Siegel noted that he was wrong in his prediction that rates would rise: “I scarcely know anyone who could have dreamed that rates would go down to 1.5% and below on the 10-year bond without a serious recession.” He attributes the situation to “factors that go well beyond central banks” and argues that long-term Treasuries have become ideal “negative-beta” assets—hedges to equities.
- Inflation prospects: Siegel says he “sees no problems on the horizon. I said a year ago that 2% inflation looks like a reasonable forecast and I maintain the same forecast today.”
- Emerging markets, says Siegel, are still lagging U.S. markets, but that doesn’t mean investors should avoid them: “If you go through the history of valuations, when sectors become relatively more attractive, then you should up your bet.”
- Value vs. growth: Will value stocks turn relative to growth? Siegel says, “I believe we’re nearer to that time than ever. I base that partly on the fact that, with interest rates permanently lower, investors are never going to get the income they need out of bonds, bank accounts or CDs.”
- Corporate tax cut: The corporate tax cut will go away only if the Democrats win the elections, says Siegel, noting “that’s not out of the question, but the markets are saying that’s an unlikely event.”