(HOLLYWOOD, FLORIDA) – Valuations are still right for stock buyers, and long-term trends should give them substantial returns versus other asset classes like bonds and gold, said Jeremy Siegel, the Wharton finance professor who gave the closing presentation at the Pershing Insite 2010 conference on Friday, June 11.
“I feel like I’m the last optimist standing,” joked Siegel at the start of his speech, which highlighted the outperformance of stocks since 1802.
Over the 1802 to 2009 period, stocks have averaged 6.6% annual returns versus 3.6% for bonds and 0.5% for gold, he noted.
“Gold is overvalued now like in 1981,” Siegel said.
As for bonds, he reminded the audience of roughly 1,000 advisors that bonds produced negative returns from 1966 to 1981 of -4/2% on average, when there was low inflation (like today).
While he acknowledged that the best buy point in recent times was in March 2009, he said the S&P 500 is still below its historical trend line. “We are under 1,100,” Siegel said.
The finance expert stressed that global stocks also have performed well in the past 110 years, with 6% real returns on average during that time. “Yes, the story is the same globally,” he noted.
Siegel explained that price-to-equity ratios should remain in the double digits, because rates for Treasury bonds are not expected to return to the double-digit levels of the late 1970s and early 1980s. “Today, the yields are nothing like that,” he said.
Siegel drew advisors’ attention to research done by Strategas, which found that in periods of low inflation, the average price-to-equity ratio is 17.7. For instance, with inflation of 2-3%, this ratio is 15.8%, Siegel pointed out.
He described recent findings of the ISI Group, as well. “By all measures, we are about 15-22% undervalued,” he said.
Siegel is generally bullish on the EU and euro, at least in the short term. “The EU got too big” too fast, Siegel explained. “But this means European exporters are set to gain,” he noted.
“I do not think the EU and the euro have hit bottom yet and should go to parity,” the professor said. “But, that said, stocks there could improve,” so investors need not sell and run.
In describing his appreciation for Pimco and the bond group’s “new normal” outlook, Siegel outlined his disagreement with Bill Gross and his colleagues. Pimco’s outlook, he said, is based on a Keynesian analysis of the economy, which failed to predict the boom that came after World War II.
“Such predications can be OK for the short term but don’t work in the long term,” he cautioned. “For the long run, you have to look at productivity growth.”
On average, U.S. productivity growth has been 2.2% a year. “It’s been 6.3% in the last four quarters,” he said.
As for the performance of the Obama administration, “it’s not as bad as it could be,” Siegel said, noting that he doesn’t expect capital gains and dividend tax rates to get above 20%. “I can live with Obama and his economic policies, and I think our economy can live with them and move forward.”