The market guru believes in stocks going up, even though they are inferior to bonds.
Jeremy Siegel has a long history of advocating equity investments, even in the face of unfavorable current conditions.
Classic book Jeremy Siegela «Long-term stocks» (released in 1994, sixth edition due next year) is the bible of the equity investor. The author, a professor at the Wharton School of the University of Pennsylvania, has calculated that stocks have supplanted other asset classes since 1802, notably bonds..
However, in recent years this has not been the case. Over the past 20 years, since the dot-com boom in March 2000, S&The P 500 recorded an annualized return of 5.87% versus 8.32% for long-term corporate bonds and 8.34% for long-term government bonds.
This is due to the sharp drop in interest rates in the 21st century, which led to a rise in bond prices (rates and prices move in opposite directions). It should also be borne in mind that stocks are more volatile than bonds..
Over the past two decades, S&The P 500 lost almost half of its value twice (due to the dot-com downturn and the financial crisis) and just over a third in the past February and March. It took several years to recover from the first two losses, while the rebound from the 2020 winter coronavirus crisis is almost over, stopping at just 3.4% below its March peak..
However, Siegel believes that stocks will soar again in the coming years. First, the short-term rates are zero, which means that the US Treasury and corporate securities do not have much room to reduce yields. (Siegel, like the chairman of the Federal Reserve Jerome Powell and many in the U.S. financial establishment don’t expect negative rates to come to America).
Bonds have been in a bull market since the early 1980s, when the Fed was holding back rising inflation, and sky-high interest rates set for that purpose gradually declined. This caused a significant rise in bond prices. Siegel says low interest rates are impending a bearish bond market today.
On the Bloomberg Radio podcast, which hosts Barry Ritgoltz, one of the most notable of Wall Street speakers, Siegel outlined why he believes stocks will overshadow bonds in the future. (Ritgoltz, co-founder of Ritholtz Wealth Management, was the source of statistics for Dimensional’s asset classes.) In addition to the fact that bonds have almost played their line of increasing yields, Siegel argues that stocks should skyrocket in the future, because in the post-viral economy the right conditions will be created for this..
Siegel explained that «as the economy opens up, as therapies and / or vaccines are developed that reduce these fears, you will see that so-called cyclical-sensitive sectors will do better.». One factor is that Americans are sitting on savings that will seek out points of application beyond deferred consumer spending..
He noted that M2, a measure of the money supply available to the population (cash and checking accounts, as well as things like money market funds), jumped 20% in the eight weeks before the pandemic began.. «It’s all suppressed purchasing power», – he said.
In his book, Siegel analyzed financial performance back to 1802 and concluded that stocks have risen by an average of 6.5 since then.–7% per annum above inflation. Of course, the professor admits that there have been periods when stocks weren’t high..
He rejects the label that some people put on him as «standing bull» in relation to the stock market, referring to his article in the Wall Street Journal in March 2000 condemning the dot-com boom. «The tech sector was selling for 90x gains, he said, compared to 32x gains today for S&P 500».
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Siegel still expects shares to outperform all other assets, albeit at a slightly lower rate of 5% to 6%. Due to all the government stimulus of late, he hopes for a temporary rise in inflation to just above 3%. However, if you are an investor in stocks, this should not bother you, he said, adding that «stocks are really good at protecting against moderate inflation».
With bonds likely to continue to deliver tiny yields and growing longevity, Siegel advises investors to switch to a 75-25 stock-to-bond ratio from the traditional 60-40..
Ritgoltz, in a commentary on his blog, praised the scientist for his intellectual flexibility. Siegel, he wrote, «one of those rare birds whose thinking continues to evolve with the markets».
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