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Siegel Sees Long-Term Value in Volatile Stocks

Monday, 03 Oct 2011 07:36 AM

Markets will remain volatile in the coming months but investors should stomach the ups and downs and stay in, says Wharton Business School economist Jeremy Siegel.

"We're going to be volatile," Siegel tells CNBC.

"The market expects it. Europe is not solved. I think the question is, is there long-term value in this market? I think there's extraordinary long-term value. If you can just stomach the short-term, this is the asset class to be in."

Europe remains a threat to stocks worldwide, as fears that Greece will default and fan a financial scare similar to the Lehman Brothers collapse are spreading to the U.S.

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Jeremy Siegel
(Associated Press photo)
The European Central Bank, Siegel says, needs to step up to the plate and protect the financial sector should that happen, similar to what the Federal Reserve did here after Lehman went under.

"Look at what the Fed did after Lehman. It basically said all the deposits are insured — they even went to the money funds, they said the senior debt is insured. They re-fenced the bad assets, they merged the banks that needed to be merged and basically quieted the fear that there's going to be a massive financial failure," Siegel says.

"The ECB has to step up and do the same thing in Europe, because I think that's the fear that is now driving the markets."

The Federal Reserve has carried out a string of measures to get the economy moving in such a way that will fuel jobs demand while not pushing up inflation rates beyond comfort zones.

Some of those measures have included slashing interest rates to near zero and buying trillions of dollars in assets from banks, pumping the financial sector full of dollars in the process.

Critics say such Fed policies will fuel inflation down the road, although Siegel says inflation is better than deflation, a condition in which prices fall and the economy and hiring slide, often down a vicious cycle.

"We don't want to go into hyperinflation," Siegel says. "We are not doing that but we want to make sure we do not go into an deflationary environment."

"The Fed says I've got to keep the price level up. I can't let those debts become extraordinarily large, which is what happens when prices go down."

Stock markets have taken a beating in the third quarter of this year thanks to European debt concerns and the U.S. debt-ceiling impasse and ensuing Standard & Poor's downgrade.

Stay tuned, as more volatility lies ahead for the last three months of the year.

"It's been one hell of a third quarter and the excitement of recent weeks is likely to continue over the next three months. We end the quarter no closer to a long-term solution to the European sovereign debt crisis ... and the global economic outlook is still a confusing picture," says Kathleen Brooks, analyst at trading group Forex.com, according to the AFP newswire.

Policymakers aren't helping, others say.

"Policymakers are in control today and they are driving this car very erratically; they’re not even telling you what the destination is, especially in Europe; and instead of looking through the windscreen, they’re arguing among each other. It feels really volatile and unsettling," says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund, according to CNBC.

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Markets will remain volatile in the coming months but investors should stomach the ups and downs and stay in, says Wharton Business School economist Jeremy Siegel. We're going to be volatile, Siegel tells CNBC. The market expects it. Europe is not solved. I think the...
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