By Michael Santoli
More than a year ago Jeremy Siegel proclaimed that the Dow Jones Industrial Average, then near the 12,000 level, was on its way to 15,000. Despite another global-slowdown scare last summer, more European-debt indigestion and a brutal election and fiscal fight, the market has just about obliged, with the Dow riding the latest leg of the four-year-old bull market to a new high near 14,600 last month.
“We’re not done yet,” says Siegel, professor of finance at the Wharton School of the University of Pennsylvania and author of Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies, 4th Edition, a study of stock returns since the 19th century.
“I think this market has a lot of room to run,” Siegel says in the attached video, forecasting a continued climb in the Dow to between 16,000 and 17,000 by the end of 2013, with a possibility of a trip to 18,000 by the end of next year.
Siegel hangs his upbeat view on the impressive profit gains of Corporate America and the extremely low interest rates that ought to embolden investors to pay more for company earnings, in the form of higher share prices. After failing to keep pace with the powerful rebound in reported profits off the grim 2008-2009 recession, stock prices since late last year have shot up quickly even as earnings growth has moderated, fattening their price-to-earnings multiple.
Stocks, according to Siegel, “should have a higher P/E” when their “major alternative” – bonds – have such low yields. The Standard & Poor’s 500 index is a bit above 14-times the consensus profit forecast for 2013, which Siegel views as modest given long-term Treasury yields around 2%.
Of course, one could counter that stocks, by these standards, only look attractively valued relative to a category of investments called bonds that most now view as exceedingly expensive.
Siegel offers that “interest rates are way too low, and the bond market is a dangerous place.” His rosy take is that long-term Treasury interest rates can rise above 3% or even reach 4% without compromising the bullish outlook for equities.
While Siegel has correctly been optimistic on stocks during the current bull market, his consistent favoritism toward equities since the publication of “Stocks for the Long Run” in 1994 has left him open to charges of being a “perma-bull.” Siegel, along with many others, was positive on stocks near the 2007 market peak and thought 2008 – the year of the financial-crisis meltdown - would be another up year. Still, his work on the return potential in stocks for those with a very long-term time horizon has not been upended even by the 2007-2009 bear market.
Siegel also points to the long-term market record to argue that stock investors need not fear the day when the Federal Reserve eases off, or reverses, its extraordinary monetary stimulus efforts.
While the stock market can be expected to wobble or even sell off sharply upon seeing the Fed become less generous at some point, Siegel points out this will only happen under better economic conditions, which would support corporate performance. The historical pattern says the start of a Fed tightening program is not what thwarts a stock bull market. Rather, only when the Fed is getting closer to the end of a rate-boosting cycle does the Dow typically peak and humble the bulls.
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