With the Dow, S&P 500 and Nasdaq in the red year to date, it can be tempting to hit the sell button and get out of this ugly market entirely.
But a prominent economist suggests otherwise.
“If you’re a long-term investor, I would absolutely buy it now,” Jeremy Siegel, professor of finance at the Wharton School of Business, tells CNBC. “I think these are absolutely fantastic long-term values.”
Here’s a look at why the professor is so bullish.
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The Fed should look ahead
One of the reasons for the fall in the stock market this year is inflation. Consumer prices were rising at their fastest pace in 40 years. While the headline CPI figure has cooled somewhat recently (August’s inflation rate was 8.3% year-on-year), it’s still worrying.
To control inflation, the Fed is raising interest rates aggressively. The central bank raised benchmark interest rates by 75 basis points last month, marking the third consecutive such hike.
If rampant inflation continues, there could be more rate hikes. And that doesn’t bode well for stocks.
Siegel points to one segment of inflation that is cooling: housing. But this is not properly reflected in the index numbers.
“We pointed out that the way these indexes are constructed, that housing costs are well behind and will continue to rise, even though, as we saw, the Case-Shiller housing index and the national index of “housing, housing prices. fall,” he says.
Siegel suggests that instead of making decisions based on lagging indicators, the Fed “must look to the future.”
“They have to look at what’s happening in the market, in the housing market, in the rental market, in the commodity market.”
“Excellent value”
The stock pullback has been painful, but that’s precisely why it could be an opportunity.
The reason, Siegel explains, is that the fall in stocks has driven down their valuations.
“When you’re talking about 16 times earnings, and even if they’re cut by a recession, and you shouldn’t just base it on recession earnings, you should base it on long-term earnings, which I think they are very favorable … I think these are absolutely excellent values,” he says.
Of course, having attractive valuations doesn’t mean the stock won’t fall further.
“Could I go down more? Of course, in the short term. In bear markets, it’s gone down more,” Siegel admits, adding that “anything can happen in the short term.”
No decade lost
The outlook can be bleak, even for those who already made billions from the markets.
Billionaire investor Stanley Druckenmiller recently said stock market returns could be flat for the next decade.
Ray Dalio’s Bridgewater Associates warned earlier this year that we could be facing a “lost decade” for stock investors.
Siegel remains optimistic.
“I completely disagree that the Dow or the S&P 500 would be flat [over the next decade],” he says.
“We have added 40% to the money supply since the pandemic began in March 2020. Historically, earnings have only increased with inflation and the money supply. So stocks should be 40% higher than they were.”
The economist explains that at one point, stocks were between 50% and 55% higher than pre-pandemic levels. But with the recent withdrawal, they are only 20% larger. And that means investors have something to look forward to in the next decade.
“To say that in 10 years, we’re going to have the same Dow when the earnings returns that I see out there in the market, shows that your returns are probably going to be around 6% a year after inflation.”
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This article provides information only and should not be construed as advice. It is provided without any warranty.
