Jeremy Siegel is known as “The Wizard of Wharton,” and in an interview with ThinkAdvisor, the Russell E. Palmer finance professor lives up to his popular moniker.
But there’s no magic here—only a keen intellect, his landmark research in stock and bond returns, and decades-long studies of the economy and financial markets.
Right now, the University of Pennsylvania securities expert—who is optimistic about earnings, bullish on stocks and bearish on bonds—stresses that dividend-paying equities are absolutely the place to go for income in today’s exceptionally low bond yield environment.
Siegel’s research on investment returns, as published in his “Stocks for the Long Run” (McGraw-Hill-5th edition 2014), has no doubt been influential in supporting the lengthy, ongoing bull market.
At Wharton for 40 years, he is academic director of the SIFMA-Wharton Securities Industry Institute. In the private sector, Siegel, 70, is senior investment strategy advisor to Wisdom Tree Investments.
Following are excerpts from Siegel’s interview with ThinkAdvisor:
ThinkAdvisor: How will a Trump or a Clinton presidential win affect the market?
Jeremy Siegel: The stock market would be a little more comfortable with a Clinton victory, but they don’t love her at all. There would probably be a modest rally in the market, especially if the Republicans can manage to hold, or be very near to holding, the Senate and [also] hold the House. That would be a check on whatever policies Clinton would pursue.
What about a Trump win?
In the short run, there would be some negatives. But in the long run, I don’t think so. There’s less uncertainty with Hillary Clinton, even though, ultimately, a lot of Trump’s economic policies, like his tax plan and plan for less regulation, are far more capital-friendly than hers.
What’s the biggest threat to the markets now and into 2017?
There’s always a terrorism threat looming. Another threat is if Trump gets elected and that precipitates some foreign policy crisis. That might be a problem. It’s part of the uncertainty. Some dictator may try to see if they can provoke something. So that’s always a possibility. But I don’t consider it to be an odds-on possibility.
What’s your outlook for corporate earnings?
I think we’re coming out of an earnings recession. I’m not saying we’re going to see a lot of top-line revenue growth, [just] modest top-line growth. Although high from the historical standard, valuations are actually [pretty] low relative to interest rates. I do think we’ll see an earnings pick-up. Third- and fourth-quarter earnings are very, very important for setting the next year. [So] if earnings don’t pick up, it would be hard to see any gains in stocks in 2017.
Why is capital spending so low?
One of the reasons is that there’s nothing for firms to invest in. They’re not finding a lot of investments with positive value.
You maintain that stocks are the safest investment in the long run. Please elaborate.
In the short run, stocks are very volatile. But in the long run, you can predict more of what the real returns of stocks are going to be than bonds because bonds are subject to inflation—and in the long run, you don’t know what that will be.
What do you see happening with inflation in the immediate future?
Very little. We’re in a low-inflation environment. We may creep up to 2%, which is the Fed’s target. But I don’t think we’re going to get much above that.
Is it fair to say that you’re bearish on bonds?
I do have a pessimistic view of bonds. Barring some disaster, I think the Fed is definitely going to raise interest rates, though not by very much. I expect them to tighten in December but [then] wait to see what happens before tightening again. However, any increase is going to harm the capital position of long-term bond holders. If you stay short-term, you’ll earn a quarter-percent average and, in maybe in a year or two, 1%. But those aren’t very good yields.
So you don’t see any bubbles?
I don’t—because I don’t see interest rates heading up very strongly. As long as there’s a modest increase in rates, I don’t see any major negatives. If earnings don’t recover at all and we continue in an earnings recession, that would ultimately be more damaging for stocks than mild interest-rate increases.
You’ve forecast that, big-picture, “We’re entering a period of lower returns for stocks, bonds and other asset classes.” On what do you base that?
We have slower economic growth and high valuations for stocks and real estate—and super-high valuations for bonds. When you start from higher valuations, that means lower returns. It’s just history.