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Jeremy Siegel: Investors Who Fled Stock Market Are Losing Out

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Prof. Jeremy Siegel speaks at LINC 2018. (Photo: Lila Photo for TD Ameritrade Institutional)

Those investors who got spooked enough to exit the stock market before COVID-19 fear ramped up and started heavily impacting stock performance may have avoided major losses initially, but they are losing out now if they are still out of the market, according to Jeremy Siegel, professor of finance at Wharton and WisdomTree senior investment strategy advisor.

“As a longtime observer of markets … I have seen this pattern so often, where advisors of many sorts” — the “so-called ‘market gurus’ — told people” that they should “get out of the market,” he said Monday during his weekly conference call on the state of the markets.

“We should give them credit if early on they did make that call,” he conceded, noting that on March 6 “everything was moving as usual” and the “virus fear exploded the following week.”

“If you got out on that week before things got bad, you avoided a 20 to 25% drop” in the stock market, he noted.

“But if you did not get back in, you are behind” now, he said, adding: “I know a lot of people who got out and they’re still out. This is just such a pervasive lesson in the markets.”

Although he conceded that the market can indeed go down again, he cautioned: “Don’t count on it …. Believe it or not, this market can set all-time highs this year.”

The main reason why the Dow Jones Industrial Average was up 350 points Monday was because there was “absolutely no doubt that not only are the number of new cases [of COVID-19] slowing in the United States, but around the world in most places,” he said.

He pointed to a Bloomberg report Monday that said U.S. COVID-19 cases were up 2.3% since Sunday, the lowest increase so far in April, according to data compiled by Johns Hopkins University and Bloomberg.

“There’s a lot of room for optimism here, but there’s also a tremendous amount of caution” that is called for, he said, noting the second wave of the Spanish flu was deadlier than the first.

Siegel called the “unprecedented stimulus” steps taken by the U.S. government and Federal Reserve a “major reason” for the “recovery” seen in the stock market performance in recent weeks after the major declines seen in March.

Despite “flaws” in the process, in part because it was done so quickly, he said, “on the whole, it was quite a remarkable stimulus plan.” However, he added: “I’m hoping that we’ll do corrective action on a few pretty egregious abuses.”

One promising sign is that certain companies have already voluntarily returned Paycheck Protection Program loans because they realized there were smaller businesses that needed them more, he noted.

Siegel again predicted that we will see a “very strong recovery” in 2021 and 2022 — one in which we could see, “for the first time in decades, inflation” of 3-5% or more — after we get effective therapeutics to treat COVID-19 cases or a vaccine for the virus.

For now, however, we are seeing the “end of the 40-year bull market in bonds,” he said.

During the Q&A, Siegel noted he’s been a critic of the Buffett Indicator, which measures the sum total of market capitalization of all U.S. stocks relative to the country’s gross domestic product. “Seventy years ago, 90 to 95% of the value of the S&P 500 was due to domestic GDP sales,” but now it is only “a little over half,” Siegel said. That means a significant amount of S&P 500 profits comes from overseas sales, and “obviously that will increase the value as our companies become global,” he noted, arguing that the Buffett Indicator should instead look at global GDP. Companies also only need to have their headquarters in the U.S. to be classified as American firms, he said, adding: “I think it’s a very misleading indicator.”

He also again urged advisors and investors to not get overly wrapped up in how companies’ stocks perform this year. “By and large, 2020 earnings are going to be terrible,” he said.

However, “one of the reasons why I think this market is buoyant” is because “there’s so much money out there — right now it’s just building up in liquidity accounts and people can’t spend because of the shutdown” and related pandemic issues, he said.

The U.S. is going to pay for the more than $2 trillion in stimulus money with the moderate inflation he predicts, which is “not a terrible way to pay for it” and is preferable to increased taxes, as an example. “The bond holder is going to be paying for this” down the road also, he said.

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