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.
How long might that period last?
We don’t know. We have slow economic growth and low productivity growth. I would hope that we might snap out of it, but there’s no sign that’s going to happen soon.
With today’s very low yields, where should investors seek income?
Stocks are definitely the place to go. If you pick dividend-paying stocks, you’d get 3% or 4% with good growth possibility.
But don’t investors pay high taxes on dividend income?
No. You pay lower taxes on dividends than on interest income. If you want to go the muni bond route, you don’t pay Federal tax; but those [provide] very low returns. Dividends are preferentially taxed at all income levels. So I’m not concerned.
What do you forecast for international and emerging markets?
Looking three to five years ahead, I think a global portfolio would outperform a U.S. portfolio. Europe is selling about 20% cheaper than the U.S. right now. Emerging markets, though they recovered very sharply [from outflows] since February, are still very attractive.
Please discuss ETFs as an investing vehicle. You’re an advisor to Wisdom Tree, an ETF sponsor.
I have some shares in Wisdom Tree. I was one of the people at its founding 12 years ago. So I was a strong believer in exchange-traded funds back then. ETFs are excellent, one of the best innovations. [Versus mutual funds], they give you liquidity and have much lower cost. They’re certainly cannibalizing the standard mutual fund industry. The 2% fees [etc.] that mutual funds charge are not at all warranted given their performance.
What do you think of actively managed ETFs?
They haven’t caught on that much. I’m not saying they don’t have a future, but I’m skeptical of those that try to outperform the market.
Some people insist that the ability to buy and sell ETFs easily is a big contributor to market volatility. What are your thoughts?
I don’t believe that. I heard the same sort of argument back in 1980, when [investors] started trading indexes. There are people who over-trade, that’s for sure, and there always will be.
Clinton and Trump don’t talk very much about reducing the national debt. How come?
No one wants to talk about that. It’s not of interest. We’ve never had the deficit talked about less in presidential campaigns over the last 20 years, in my opinion. Trump mentioned that there’s $20 trillion of debt, but with interest rates so low, no one really cares. If there’s going to be a crisis maybe, it will be 10 years away.
What do you foresee regarding the strength of the U.S. dollar?
It will remain relatively strong. Both Kuroda [Bank of Japan governor] and Draghi [European Central Bank president] would like to see their own currencies depreciate a bit more against the dollar. So I don’t see any dollar weakness because that would be met with more aggressive policies in Japan and Europe. I think the major currencies are fairly well aligned at this point.
What impact will Brexit have on the U.S. market?
Basically, it’s a non-event. No other country is following suit. There’s no sign of that; so it isn’t a major consideration.
What are your thoughts about U.S. consumer sentiment?
Economists have argued about the significance of consumer sentiment. It’s weakly related to consumption. So I wouldn’t put too much emphasis on it. But when you look at those numbers in comparison to the business cycle, you really see a correspondence. They plummeted after the financial crisis. And right now they’re just finally getting back to near pre-crisis levels.
What are your estimates for the S&P 500 and the Dow Jones Industrial Average for 2016?
It depends on earnings. If earnings are good in the third quarter, I can see the S&P moving above 2,200. At 2,158 [today], we’re not that far. I think the Dow could hit 19,000. It’s about 800 away. Those things could happen if we get some good earnings.
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