It isn’t every day that you get your opinion validated by the likes of Jeremy Siegel, the “Wharton wizard,” market commentator and senior investment strategy advisor for Wisdomtree ETFs.
Siegel delivered a very bullish talk at Sourcemedia’s ETF 360 conference in New York. “Stocks have never been so much cheaper relative to bonds,” he said. “The ‘New Normal’ pushed by PIMCO’s Bill Gross is not new and it’s not normal.” That’s because that kind of negative view is based on Keynesian thinking, which is a poor predictor. For example, looking at the aggregated economic data failed to predict the post World War II boom.
The primary driver of long-term economic growth is productivity growth and not aggregate demand, he said, showing charts that demonstrated an upward trajectory for quarterly productivity. Productivity comes from innovation and discovery, Siegel told a crowd of about 150 advisors and ETF producers at the Helmsley Hotel.
“History shows that the rate of discovery is influenced by the number of individuals engaged in common research," he said.
With the internet, several billion people can communicate at once leading to an explosion of research and ideas, which will underly further productivity growth. That will increase disposable income and the availability of products, which in turn will increase demand.
Siegel displayed numerous charts showing that the long-term trend for stocks is upward. From January 1802 to June 2010, stocks have had a real return of 6.6%, he said, compared with 3.6% for bonds, 2.8% for Treasuries and 0.6 for gold. And over a 20-year holding period, an investor would have fewer losses with stocks than with bonds. This doesn’t just apply to U.S. stocks, but international equities as well. “In every country in the world over time, stocks beat bonds, showing that the equity premium is extremely robust,” he said.
"Ten-year nominal bonds today are returning 2.5%, that minus inflation equals zero return,” he said. “That’s crazy. The bond bubble is gonna burst.” (He pointed out that 10-year TIPs are returning no more than 40 basis points.)
Valuations on stocks on the other hand are tantalizing both at home and abroad, he said. Estimated earnings for 2011 for the S&P 500 are $93.96 at a price to earnings ratio of 12.44, which is 20% below its mean of 15, and 45% below its mean of 18, when interest rates are low. The quality of earnings for the four quarters of reported earnings was high, running at 91.7% ofoperating earnings versus the long-term average of 84%. “The average return when you’re investing below the average p/e is 11%,” he said. Emerging market stocks are even cheaper, at 10.6 times earnings for the 10 Largest High Dividend Emerging Market Stocks. “If you can pick emerging markets up for under 20, these are very cheap markets,” he said.
“You did miss the bottom if you didn’t invest before last March, but “I don’t think it’s over,” he said. “In the long run, the pessimists have always been wrong.”