Shoulders of Giants – Jeremy Siegel’s Outlook for Stock and Bond Returns 2015

Jeremy Siegel, best known as “Wizard of Wharton”, gave a presentation about his outlook for stock and bond return on 11/18/2015. You can see the full replay from following link:

http://livestream.com/livecfa/Siegel15

As a finance historian, Siegel’s predictions are sometimes “right on” based on his observation on long period of time. A famous ancient Chinese saying says “Take history as a mirror and you will know the rises and falls.“. A western equivalent is Victor Hugo famous quote: “What is history? An echo of the past in the future, a reflex from the future on the past.” For the respect of history, I listen to Siegel closely.

Some key takeaway from this presentation:

  • Stock market is NOT in a bubble now, even though the currently P/E ratio (“the best single metric of valuation” per Siegel) is right under 20, compared to last 60 years median of 16.7. His reason is that when looking at periods excluding “super high” interest rate (>=8%), the average P/E was 19, very close to what we have now. Basically it means that the market is fairly value, or even undervalued considering the extreme low rate currently. However, I noticed he used the “average” instead of “median” after excluding the high interest rate periods, which is an inconsistent comparison.
  • Over to bond market, Siegel expects the low yield will prevail for the next “decade” because of the slowed down economic growth and increasing risk aversion (aging investors, desire for liquidity & de-risking pension funds). Siegel predicted the short term rate target is 2%, 3 to 3.5% for long term, which would impact all other asset classes prices. The short term 25 bps rate hike “will not kill the economy”, and we won’t see another hike until June 2016.
  • Siegel thinks after the hike, value and dividend stocks will outperform because the market has already overreacted moving out of the dividend/yield stocks. From my own experiences, I did find many REITs appear cheap but I am also cautious about how the first rate hike would impact the asset pricing of real estate.
  • “The single biggest mistake in finance education is using yearly return standard deviation as the volatility/risk measurement”. This resonates with long term investors like me. It is the same error that we use yearly return as a performance measure, because businesses grows with economic cycle which spans multiple years. Using December 31th as a cut off is really a arbitrary decision for determining the success of an investment thesis. Siegel showed that when we look at 5 years and 10 years returns over the past 200 years, the stock return curve smoothed out and appeared much less “risky”.

 

 

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