Tags: Siegel | Dow | bull | S&P 500

Jeremy Siegel: 'I Don't Think This Bull Market Is Over'

By    |   Tuesday, 11 March 2014 09:41 AM

Stock guru Jeremy Siegel, a finance professor at the University of Pennsylvania, says stocks have more room to rise.

Fair value for the Dow Jones Industrial Average lies at 18,000 and for the Standard & Poor's 500 Index at 2,000, he tells CNBC. That would mean an 11 percent rise from the Dow's Monday close of 16,418.68 and a 7 percent increase from the S&P 500's Monday close of 1,877.17.

"I don't think this bull market is over," Siegel states.

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Siegel said last week that the Dow could reach fair value by year-end.

And how did he come up with the fair value levels?

"I say that from looking at the last 60 years of data on earnings, interest rates and stock prices, and recognizing that the average price-earnings ratio is 18 to 19 whenever you are in a low to moderate interest-rate environment such as we're in today," he explains.

He notes that analysts' earnings forecasts are very strong for this year.

So where could Siegel's forecast go wrong? If interest rates go much higher, he contends. "I actually had thought that by this time in the business cycle, we would see [10-year] Treasurys at 4 and 4.5 percent." The 10-year yield stood at 2.78 percent late Monday.

"When I look ahead and [see] so many people wanting bonds, the aging of society, retirement, I don't think the 10-year will go much above 4 percent."

An inflation surge could topple his forecast too, Siegel says. "If gasoline goes up to $4.50 or $5 [a gallon], certainly we have to look again. But at this point, the signs are just very favorable."

So what happens to the stock market after it reaches fair value?

"Then you look at history: 6 percent [returns] after inflation" once fair value is achieved, Siegel notes. "Even when you're at fair market value, stocks have offered excellent returns."

To be sure, stocks can be volatile year to year, rising 25 percent one year and falling 10-15 percent another, he says.

"So no one is going to say that's going to be a steady increase from year to year, but it's something for long-term investors, all the young people that I teach that are putting their money in 401(k)s, IRAs, they are the ones that can look forward to these returns."

Hedge fund manager Seth Klarman, founder of the Baupost Group, doesn't share Siegel's enthusiasm. Market gains were overdone in 2013, he says.

"Any year in which the S&P 500 jumps 32 percent and the Nasdaq 40 percent, while corporate earnings barely increase, should be a cause for concern, not for further exuberance," he writes in a letter to investors obtained by the Financial Times.

"On almost any metric, the U.S. equity market is historically quite expensive."

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Stock guru Jeremy Siegel, a finance professor at the University of Pennsylvania, says stocks have more room to rise.
Siegel,Dow,bull,S&P 500
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2014-41-11
Tuesday, 11 March 2014 09:41 AM
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