Jeremy Siegel: Don’t Fear a Correction; Stocks Still Cheap

As for interest rates moving higher, “I think rates are going up,” he said, but “ I don’t think we’re heading for the double digits,” though he does suggest that the 10-year should be at “4%, 4.5% by the end of this year.”

The rise in rates may be the trigger for the correction, he said, since “there are hundreds of billions, if not trillions, of dollars, just on tactical asset allocation, moving between stocks and bonds.” However, if rates rise due to “real economic growth, not rising inflation, it’s good for stock prices.”

When asked by Wilson about the outlook for alternative investments, Siegel said he still saw value in U.S. real estate, but that he remained “skeptical of gold.” Last year’s gold trade, he said, was “motivated primarily by those who thought hyperinflation was going to come or there was going to be a financial collapse. Both eventualities have become very remote. I don’t see much of an increase in gold this year.” While he said there remains “room for gold in a diversified portfolio,” the Stocks for the Long Run author argues that “stocks, being so liquid, are still very attractive and should be the bulk of your wealth holdings.”

With all this optimism, what does Siegel worry about? “Europe could disappoint,” he says, and if he sees “run-ups in commodity and oil prices, I would think we don’t have as much slack in the economy as I thought.”  

He also thinks “there’s going to be disappointment on the periphery” in Europe, where even though those nations “are tied to the euro, they don’t get German rates because of the risk premium.” Those periphery nations are faced with interest rates in the 5% to 7% range, and without the balance sheet corrections in stocks and real estate “that’s put so many Americans back in a positive position.” One solution, he suggests, would be “bringing the euro down,” an action that “would help exports and the tourist trade dramatically.”