Controversial economist and author Jeremy Siegel took a lot of heat last year when markets hit bottom. The Wharton School of Business professors thesis that stocks always beat bonds over the long term looked shaky with bonds outperforming stocks over the previous 5, 10, 15, 20 and 25 years ending June 30, 2009. Commentators poked at his analysis of historical stock performance, including the Journals Jason Zweig. (Mr. Siegel responded here.)
Since then, of course, its been a pretty good year for stocks. And Mr. Siegel thinks theres more room to run. Mr. Siegel was in Hong Kong talking up the virtues of stocks over bonds to institutional investors at a conference sponsored by Fidelity International. He also had something to say about Bill Grosss new normal, China, and why the U.S. economy wont enter into a Japanese-style funk.
As we approach the anniversary of the stock market bottom, its been a tumultuous year, hasnt it?
Siegel: Its been an excellent 12 months for stocks. I wouldnt call it tumultuous. One of the biggest 12 month gains weve had in history. Now the preceding 12 months werent so good.
How were you feeling a year ago as markets hit bottom?
Siegel: Was it difficult the last year and a half? Yeah. It was difficult leading up to March 9 [2009]. I would love to say I saw it coming, but I didnt know [the financial institutions] were holding these assets. Yes. It was very painful. The thesis Stocks for The Long Run seemed pretty nonsensical at that particular juncture.
Whats your sense of market valuations today?
Siegel: We are still below the long term trend the way I measure it. I still think the market is 15% to 20% undervalued at current levels In 2000, we were way overvalued, in 2008 we were way undervalued. Whats there to say. Thats the way the market goes .Why do stocks offer higher returns, its because they are so difficult to hold over long period of time they get discounted in the marketplace. It is very difficult to hold through those periods .I still think we are undervalued based on forecast earnings we are probably selling at 13 times or 14 times. And given the level of interest rates so extraordinarily low, these are fat premiums I think. This is going to be another double digit year of stock market gains.
Japan has just finished up its second decade of stock market declines. Does it give you pause to see a big, industrialized economy deliver that kind of horrid stock performance? Could the U.S. be in a similar situation after the bursting of its stock and property bubbles?
Siegel: We never had the size of the bubble that Japan had in the 1980s. Their stock and real estate markets went much higher in terms of fundamentals than ours did When you get 100 price-to-earnings ratio like you did in Japan, its not so unexpected The Bank of Japan acted slowly in reaction to the collapse of the equity market and the economic decline, while ours acted quickly. And we have a central banker in Bernanke who is very committed against deflation and provide enough liquidity to prevent it from happening
Youve said Pimcos Bill Gross is wrong about a new normal economy, in which the developed world grows at subpar levels as deleveraging takes place.
Siegel: Hes not right. Hes only looking at demand and when you look at long term growth you have to look at productivity. And he doesnt look at productivity. He never enters into it. If you go back through history and talk about improvements in standards of living and long term growth, its all productivity growth. Hes just looking at a very short term demand oriented model. Thats very good for the short terms but its not applicable for the long term as he makes it out to be.