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Jeremy Siegel Recent Video – Comments on current market valuations in relation to current interest rates

July 31, 2011

I recently watched and interview with Jeremy Siegel Professor of Finance at the Wharton School of Business. Now of course I suspected Siegel would be bullish because he always is. So it is hard to get too excited by his message. I did however think that he raised some good points in the interview.

I’ve made some notes and provided the link.

Why is now a good time to buy stocks ?

Siegel – Historically the market trades at a PE of 15 and now trades at a PE of 13. So cheap, but not overwhelmingly so. Siegel did make the point though that we do not buy stocks in a vacuum. The only time stocks have been under a PE of 10 is when interest rates are outrageously (double digits) high. So now with our ultra low interest rate world the stock market at a PE of 13 is very , very attractive.

Relative to bonds he doesn’t feel he has ever seen stocks at such compelling values.

He thinks interest rates are going to go up. No idea if it will be sooner or later, but with interest rates this low bonds are very risky.

Siegel went into a discussion of a study he did over the last 50 years that revealed that the top 100 dividend paying stocks in the S&P 500 beat the index by 2.5% over that period.

Siegel was asked about investing in gold and commodities. His answer was that five years from now he expects that commodity investors are going to be disappointed. He then refers to a chart that shows that stocks have outperformed commodities. Also makes the comment that he would rather own a gold miner or an oil producer than the commodity itself.

(My comment here, I have no idea how it is relevant to look at how commodities performed over a forty year period without considering the supply and demand characteristics of the current environment. For example, if we are at the maximum rate of oil production today that we will ever reach but demand continues to grow what relevance is what a chart of the prior hundred years over which we continuously raised oil production ?)

Siegel refers to oil and gold producers lagging the commodity and being priced at a discount.

Still thinks index investing with its low cost is an intelligent investment plan.

Siegel was asked about how the increase in age of our population and the increase in pensioners impacts the relevance of his historical studies. Siegel thinks that this is going to get a return to a focus on dividend paying stocks for income for pensioners and protection from inflation.

If indexing Siegel likes value (low PE and dividend) focused ETFs or indexes.

Asked why he thinks corporations are holding so much cash. He thinks it is partially tax reasons which encourage buybacks rather than dividends. Siegel prefers dividends and buybacks to using cash for M&A.

Siegel thinks there is a bit of a bubble in the Social Networking stocks.

Thinks the second half of the year will be good for the markets. (I always cringe when someone is willing to give such a short term forecast).

Asked about emerging markets, which he thinks are attractive with a PE in the mid-teens and fast growing.

Here is the link to the video:


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