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Portfolio > Alternative Investments > Commodities

Jeremy Siegel: No Bubble, No Reason to Fear the Fed

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“Am I the last bull standing?” Wharton professor Jeremy Siegel asked the crowd of 2,000 advisors and others at the Inside ETFs 2016 conference in Hollywood, Florida, early Tuesday.

“OK. I am the token bull of the conference,” Siegel answered to applause. “There is no reason to apply the bubble label” to today’s equity market.

While he joked that he “feels like an endangered species,” the financial specialist laid out a case for equities.

Unlike DoubleLine CEO Jeffrey Gundlach, who spoke at the conference on Monday, Siegel says he doesn’t see a need to demonize the Federal Reserve or fully anticipate multiple interest-rate hikes.

“There is no reason to say the Fed is artificially inflating value. If that was true, we would see a 25-plus PE ratio,” he said.

“Everyone fears the Fed and [multiple] hikes,” Siegel said. “But since 2008, they have predicted [a series of hikes] and never did it. The market knows they are never going to do it.”

In fact, he adds, the market is indicating that only about one-third of the hikes the Fed has described as a possibility are likely to happen.

“Read the October meeting minutes,” explained Siegel. “The Fed is not moving to [support higher rates] this Wednesday, the Fed is not likely to do so in March, and it may or may not do so in September. It will only do so if the economy is healthy and if oil prices are stable. And with the current uncertainty, I do not think they will do so.”

The finance professor urged the Inside ETFs crowd to recall that in September, the Fed did not raise rates due to market volatility. “And given what we have had this past month, I think it is short-sighted to not think they will take this into account. The Fed is basically going to be on hold.”

Conditions then could become “really normalized,” Siegel says. “That is going to be really good for earnings and for the market.”


The Wharton professor also explained why the current level of price to earnings — just under 17 on average — is acceptable.

And he acknowledged that bearish sentiment is rampant: “The bearish indicators of August … were the worst since Lehman Brothers collapsed. They exceeded those of Sept. 11, 2001 … over China and emerging-markets concerns.”

Was that a buying point? “I think so, when all [investors] get bearish,” he stated. “And now, we’re not way above the trend line.”

Still, he admits that today’s returns are lower. “We will see 5% returns” for a while, Siegel said. “How many investors would love to have that? They’ll take 5, they’ll take 4, and they’ll take 3!”

Oil Prices ‘Never Going Back to $100′

Issues putting pressure on the performance of companies and the economy overall, he adds, include deflation.

“This is the problem now, oil. There cannot be gains with oil down at $26 a barrel … 30% of capital expenditures over the past five years have been directly and indirectly gone to the oil industry,” Siegel said.

Plus, deflation “is a threat to any entity that has debt,” as many energy companies do, he adds.

With the ability of countries like Saudi Arabia to pump vast quantities of oil out of the ground, even at low prices, and the growth of fracking, “The price of oil is never going back to $100,” Siegel said. “The cap is at $60 … and it may take three to four years to get to that level. But we can live, even thrive, at this level.”

Since 1802, long-term real yearly returns for equities have averaged about 6.7%, while they have been 3.5% for bonds, he said.

“Commodities have little to no return,” he stated. “Are we really selling a valid asset class [when offering clients commodities]? And with their correlations, are you getting any diversification? You must think about this when considering commodities as an asset class.”

Siegel stressed, “We are going to see lower returns going forward. We are entering a period of lower returns for stocks, bonds and other asset classes.”

Equity returns from 2000 to 2015 were only 2.6%, though globally they were 4.5%, he notes. “Valuation globally is key.”

The median price-to-earnings ratio of the past 60 years is about 16.8; it peaked at 30 during the tech boom in 2000. “Yes, we are a little bit above [this median], but not much. With low interest rates, the average PE has been 19, and we are not there presently.”

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