Return of the bull

Not all of investing’s cherished truths have disappeared. Stocks for the long run remain a reliable source of adequate pensions, argues Jeremy Siegel

Jeremy Siegel

Five years after one of the most disastrous financial crises in economic history, investors are still shell-shocked. How else can we explain bondholders accepting negative real bond yields with stock valuations so promising.

We know there is a human tendency to overreact, and I believe the pendulum has swung too far back. Investors and the financial industry have become overcautious. At the height of the crisis, when housing prices were 30% to 40% higher than today, banks were willing to lend 100% on a non-documented loan. Today, with real estate prices at rock bottom, financial institutions request endless verification. This is part of the reason why the US economy continues to see a slow recovery.

Are equities near dead? Going forward, stocks can continue to generate real returns between 6-7% a year for two reasons: first, the valuation of stocks is currently at or below its long-term average. This is the most powerful indicator that stocks will appreciate.

But productivity growth will also be restored or even exceed its long-term average, reaching perhaps 3% or more per annum over the next five to 10 years. Thanks to the communications revolution, collaboration has become possible on a scale previously inconceivable, and this should spark productivity growth. There is no reason to be a productivity-growth pessimist on the US and many other developed markets, as quite a few people have become.

Consequently, I believe a significant share of plan sponsors’ portfolios should remain invested in equities to generate sustainable and adequate pensions. Stocks remain a promising long-term investment. As long as price-earnings ratios do not rise to unsustainable levels, one should remain bullish on stocks.

30 REMARKABLE YEARS

Now, some may discount this as the old ‘mega-bull’ Siegel, but you have to be fair: while I, like many others, did not foresee the bear market of and, I have not always been bullish on stocks. We know there is a human tendency to overreactJeremy Siegel There have been times when I recommended the purchase of bonds, and I came out with a very bearish opinion piece in the Wall Street Journal in March when the growth prospects of new technology were widely overrated.

I agree that the last 30 years have been remarkable for bonds. Yet, we are unlikely to see a 16.5% return for a 10-year Treasury bond any time soon, as we did in. Bonds can be very risky, and my research has shown that US Treasury bond returns were negative after inflation for a full 35-year period after World War II. There has never been a 20-year, much less a 35-year period in stock market history in which real returns on stocks were negative.

While stocks do have greater volatility in the short run, they generate sound returns for a long-term retirement saving plan. Stocks also had extraordinary returns over the past 30 years, close to their normal return, as the 200 years of data I’ve examined show. Looking back, the high returns on bonds over the last 30 years were an anomaly.

Naturally, my outlook is based on a number of premises. While developed markets had to make significant adjustments in response to the Great Recession, I expect China and other emerging markets to continue to grow at rates of 5-7% per annum. This is growth that firms in developed markets can capitalize on. In, an estimated 45% of profits of the S&P 500 firms came from foreign sales, and I expect that to increase over time. These are great opportunities for firms and – by extension – for investors.

There is a concern among investors that the aging of the developed world will cause baby boomers to sell stocks to finance their retirements, bringing about a long and painful bear market. But I am convinced the strong growth of the emerging markets will generate enough appetite for stocks to keep prices high. Many Western companies, particularly multi-nationals, will come to be owned by Asian investors by. Brand names like Procter & Gamble or Louis Vuitton may remain, but most of their investors may come from Asia. If capital and trade flows remain open, investing in stocks should remain the preferred saving strategy.

Return of the bull

Not all of investing’s cherished truths have disappeared. Stocks for the long run remain a reliable source of adequate pensions, argues Jeremy Siegel

Jeremy Siegel

Return of the bull

Not all of investing’s cherished truths have disappeared. Stocks for the long run remain a reliable source of adequate pensions, argues Jeremy Siegel

Jeremy Siegel

Conference Call: Adequacy

From feast to famine

The risk of overreacting to risk

#25 Lost in transition