By Paul R. La Monica
When Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania's Wharton School, first published Stocks for the Long Run in January 1994, many of the companies that today's investors prefer for the long run didn't even exist.
Amazon.com was founded in July 1994. Google (now Alphabet) was launched several years later. Tesla and Facebook (aka Meta Platforms) didn't get off the ground until the early-to-mid 2000s. And Nvidia, today's No. 1 stock market darling, was barely a toddler, having been birthed only in early 1993.
As for the Dow Jones Industrial Average, it was packed in 1994 with the likes of Bethlehem Steel, Eastman Kodak, Goodyear, Sears Roebuck, and Woolworth. None proved a great stock over the next three decades -- or even in the medium term.
But that wasn't Siegel's point. Subtitled The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, Siegel's book made a compelling case for diversification, and argued against trying to pick individual stock market winners and losers.
Seigel also recommended staying invested, and resisting the urge to market-time. If you owned an S&P 500 index fund when the book was published and held on to it, that investment has grown exponentially, as the index has gone from just under 470 to about 5550 now, a gain of nearly 1,100%. Nvidia, meanwhile, has become the third-most-valuable company in the world, worth more than $3 trillion.
A passive approach to investing, which Siegel advocates, ensures that you will continue to own America's most dominant companies in vibrant industries. Siegel, also a senior economist at the investment firm WisdomTree, said he remains a "strong believer in indexing," adding that "it's hard to beat an index portfolio no matter how you do it" -- especially once you factor in fees for an actively managed fund.
Barron's spoke with Siegel on July 1 about the legacy of his book, now in its sixth printing; what he thinks about stocks today; and where the market is heading in the even-longer run. An edited version of the conversation follows.
Barron's : What are your book's most important points that still hold true today?
Jeremy Siegel: The data go from 1802 to the present. The long-run real [inflation adjusted] return on stocks has averaged 6.8% a year in that span. In the first edition of my book, the real return was 6.7% a year.
In the past 30 years, we had a financial crisis, the Covid pandemic, and other ups and downs, and the real return still averaged 6.5% to 7% a year. That is the power of the persistence of long-term real returns. Although stocks are the most volatile asset class in the short run, they are the most stable asset class in the long run. No other asset class in the U.S. has achieved that over any longer time period. Bonds, gold, and real estate can't match the real return of diversified publicly traded equities.
The valuations of leading technology stocks are more reasonable today than in the dot-com years of 1999 and early 2000, even if some are stretched. Are you concerned about the possibility of another technology bubble?
We have always had momentum traders in the market, and momentum investing can be a fairly successful strategy. People ride the wave with the belief that they can jump off before it crashes. That, of course, doesn't often happen. But we are nowhere near the internet bubble. That was a much more severe situation in 1999 and 2000. That was the biggest momentum wave that I've ever seen.
It's difficult to beat the indexes, given the momentum for the artificial-intelligence-related tech stocks. In some ways, that has taken all the oxygen out of the room, although they are delivering the bacon. Earnings are coming through, and their valuations are nowhere near the stratospheric valuations that we saw 20 to 25 years ago.
You famously called the stock market "remarkably durable" in the book. Is it more or less durable now than 30 years ago?
It is durable, but I predict slightly lower returns in the future. My prediction now is closer to 5% to 5.5% annual real returns in the next 10 years. That is because the price/earnings ratio of the market probably should be around 20, which is pretty close to where it is today.
As the P/E drifts upward, forward-looking returns have to be muted a bit. But sometimes when I say that, people ask me, "Dr. Siegel, I can get nearly 5% in Treasuries. Why should I go for stocks?" And the answer is that you're comparing apples to oranges. These are after-inflation rates of returns. Treasuries don't correct for inflation. Treasury inflation-protected securities, or TIPS, yield only 2%. So that 3%-plus difference year after year after year can mark a significant difference in wealth for a long-term portfolio holder.
You have said that bonds are a terrible hedge against inflation but a good hedge against geopolitical risk. With concerns about inflation ebbing and geopolitical worries rising, is there a greater case for bonds now?
Bonds do well in times of geopolitical risk, recession risk, and financial-crisis risk. They also did well at a time of pandemic risk, if you want to add that. However, there is one type of risk for which bonds are extraordinarily ill-suited, and that's inflation.
Don't forget, we had 30 years of virtually no inflation from the 1990s up until the pandemic. That's why people were buying bonds with yields of 1% to 1.5%. Inflation wasn't a risk because we thought people knew how to control it. That didn't prove to be the case. Now you have to contend with that inflation-risk boogeyman if you're a bondholder, and that is one of the reasons that yields have gone up. People have to be compensated for it. You could argue that geopolitical risks are high but inflation risks are higher.
Do you think the Federal Reserve will cut interest rates this year?
I expect a rate cut this year. The economy is softening. It isn't collapsing, and there isn't a recession, but inflation is softening. Commodity prices are off their highs. We will see lower rates, maybe one cut in September and one in December. We could see more. The long-term federal-funds rate should be somewhere between 3% and 3.5%.
People talk about the Fed cutting by a quarter-point [0.25 of a percentage point] each time, but the Fed could cut rates by half a percentage point. If we see any slowdown, the Fed will want to get to a 3%-3.5% level as soon as it can.
How do you expect the stock market to perform for the rest of the year?
We were all surprised by the move in the first half of this year on the back of tech and Nvidia. We've had a bifurcated market -- not as bifurcated as 1998 and 1999, but tech stocks are selling at 30 or more times earnings and everything else is selling at 17 or 18 times. Smaller stocks have P/E multiples of 14 or 15. They haven't seen many gains this year. Momentum in tech is still there, and that could drive stocks upward. I don't expect a rotation away from tech until we start getting rate cuts.
Rate cuts affect smaller stocks much more than large ones, and improve their margins and profitability. I don't see value investing coming back from the doldrums until we get the rate cuts.
What do you think of Bitcoin? How much should investors own as a percentage of their assets?
I don't own any Bitcoin, but I don't have antipathy toward it like Warren Buffett [the CEO of Berkshire Hathaway] does. The bigger disappointment with crypto is that it is so correlated with the Nasdaq. You don't get the diversification. Usually, you talk about an asset class as having different types of characteristics so that it doesn't move in tandem with other assets.
On the other hand, look at our sleepy banking industry and crazy payment system. We can go on and on about banking hours being only 9 a.m. to 3 p.m. and five days a week. We should have 24/7 instantaneous clearing. Bitcoin is trying to free us from the stodginess and uncompetitiveness of the banking system. The Fed should enable banks to do instantaneous clearing and have safeguards for fraud.
The election is on everyone's minds. Will the outcome matter to investors? How so?
The stock market has a preference for Donald Trump because of taxes and regulation. Investors aren't happy with tariffs or some of the unpredictability of Trump. But they lived with him for four years. They know him better than they did in 2016.
The bigger issue is what happens to Congress, because Congress will decide what happens to the Trump tax cuts. Even if Trump becomes president, if the Democrats capture the House or keep the Senate, you could have a very different tax landscape in 2026 than you do today. That is going to be important.
In the really long term, the market goes up under Democrats and Republicans, as long as the government isn't socializing the economy.
How are you thinking about the deficit and the likelihood of more federal spending?
Running up the deficit is a long-term problem, but I'm not a deficit hawk. I'm not panicking. I don't see a potential crisis brewing for quite a long time, not until the mid-to-late 2030s.
If the bond market starts raising rates, it will signal that the country has too much debt and Washington has to do something about it, such as cutting expenditures and raising taxes. The government will have to deal with it at some point in the future, but not the near future.
What is your advice for someone just starting to invest?
It isn't much different than 30 years ago. Put your money in a diversified portfolio. Put it in a 401(k) or individual retirement account and just watch it grow. Some years it will be down. But it will catch up.
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July 26, 2024 21:30 ET (01:30 GMT)
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