Rational Exuberance: Jeremy Siegel on Stocks
WHY YOU SHOULD CARE
Because the recession knocked the wind out of us.
Bubble or real growth? The Dow Jones Industrial Average is near 18,000, which to some people seems exuberant enough, but Jeremy Siegel believes it’ll hit 20,000 by year’s end. The Wharton finance professor has long been known for his bullish tendencies — the thrust of his work is summed up neatly in the title of his book, Stocks for the Long Run — and he believes that stock values will grow over the long term, even if they might be overvalued in the short term. Siegel, a 69-year-old Chicago native, often appears on finance shows with his long-time friend (and Nobel-Prize winning economist) Robert Shiller to spar over the direction of the economy and markets.
In a recent conversation with OZY, Siegel talked about long he expects the economic recovery to last, whether stocks are overvalued right now, what the government should do to stoke productivity, and how to understand structural changes in employment. Hint: All those manufacturing jobs aren’t coming back.
OZY: The U.S. economy has bounced back since the recession and the stock market crash of ’08. How long will the recovery last?
Jeremy Siegel: I see no signs of a recession on the horizon. However, the bounce back has been disappointing in terms of GDP growth. We are well below the GDP growth established before the financial crisis. Productivity has been extraordinary. But there are still concerns, despite the fact that we’re raising a good number of jobs.
OZY: What enabled the rebound?
J.S.: I think monetary policy was the most important factor keeping the quality of the economy strong and helping keep interest rates low. That has stabilized the housing market and the stock market. And low interest rates and higher asset prices have been the source of growth and a return of investor confidence in the economy.
OZY: Why has the stock market recovered?
J.S.: Earnings have bounced back. We’ve seen record-high earnings. We’re above the profits that were set in 2007 before the recession began, and the low interest rates have helped capitalize these higher profits and boost stock values.
OZY: Some say U.S. stocks are expensive. Do you?
J.S.: No, I don’t agree with that. They are slightly higher than the historical average. But given the extremely low interest rates, I actually think they’re cheap. I still think we have 10 percent to go before I’d call this market fairly valued. We are not undervalued as we were in 2010 and 2011. We’ve had an extraordinary recovery. I don’t agree with those people who say the stock market is overvalued or in a bubble.
OZY: So is the time ripe to invest in the market?
J.S.: Absolutely. Interest rates may go up, but not much. I’m still a fan of dividend-paying stocks. They offer an average of 2 percent interest, which is higher than you get in the bank or money market funds.
OZY: In the past, you’ve recommended allocating 50 percent of one’s portfolio to stocks including 25 percent of investment in overseas markets and 25 percent in emerging markets. Why?
J.S.: I like that allocation. Emerging markets will prove to be most rewarding for stockholders. I’m not trying to pick the countries that do well, but throughout all of them, their valuations are higher than developed markets and they’re growing two to three times faster.
OZY: Which are the strongest economic players, globally, right now?
J.S.: The U.S. and emerging markets are strongest. World stock markets are extremely coordinated. The U.S. cannot have a bear market without affecting Europe and emerging markets. Clearly we’re further along on recovery than Europe, which is just beginning to recover, but their stocks have experienced a bounce back, and they’re still cheaper by 10 percent than the U.S.
OZY: Unemployment rates have fallen in many states within the U.S. What’s driving that?
J.S.: Clearly what’s driving it are economic growth and moderate wages, and confidence returning to businesspeople so they don’t fear that there will be another crash around the horizon. They got rid of a lot of workers. But now they’re more confident that the economy is going to expand.
OZY: While those who work on Wall Street prosper, some of those who toil on Main Street have been left behind. A walk down the main shopping drag of Allentown, Pennsylvania, and Gary, Indiana, reveals many vacant stores. What could be done to help them?
J.S.: This is a trend that has been going on for 30 years. Actually, the number of manufacturing jobs has risen after the recession. We can’t go back to the way it was where factory workers got cradle-to-grave security from GM. This is not the world we live in.
OZY: We’ve come a long way since 2008, but some say we need to see the economy strengthened. If you were an economic adviser to the president, name two things that could be done to jump-start the economy.
J.S.: I think we have honestly been burdened by too much regulation, too many restrictions. The number of firms that are going public has dropped dramatically. The Wilshire 5000 can’t fill 5,000 stocks, and many companies are staying private or being bought out by someone that is public. We need to encourage investment and encourage businesses. We need to make it easier for people to start a new business and subsidize it. Capital investment has been laggard in this recovery and that needs to be addressed. We have to continue on the free-trade route. I’m disturbed by the anti-free-trade sentiment floating in Congress. That has never been the answer to making the economy better.