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Jeremy Siegel: Market Valuation Is 'Quite Reasonable'

Jeremy Siegel: Market Valuation Is 'Quite Reasonable'

(AP Images/Mark Lennihan)

By    |   Friday, 23 September 2016 12:19 PM

Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School, argues that the current market valuation is "quite reasonable."

He also cautioned CNBC that the Federal Reserve is most likely poised to raise interest rates by the end of the year.

"There's three challenges to the market. First of all, earnings which have been in a recession. We want to see earnings start moving ahead instead of stagnating," he said.

He also cited the "uncertainty of the election." And then "I think the Fed is teeing up a December increase. So after the election, once they're trying to digest that within three or four weeks they're going to say another Fed increase. So there's a lot of challenges there," he said.

"We have about an 18 P/E ratio looking forward in a low interest rate environment. That is quite reasonable. I mean, that's about a 5.5% earnings yield." (The PE, or price/earnings, ratio is the ratio of a company's stock price to the company's earnings per share.)

And in a world where the 10-year Treasury bond yield is about 1.5%, "5.5% is pretty good," he said.

While he admits economic growth leaves a lot to be desired, there is a benefit. 

"Slow growth has that silver lining," he said, explaining that companies haven't been spending or borrowing to fund capital expenditures. "One of the reasons interest rates are so low is there hasn't been any persuasive technology that firms think they have to invest in. That means more money back to the shareholder," he said. "The silver lining of slow growth is more income back to the shareholder," he said.

 

"I think the big tectonic shift is people are for the first time in maybe 50 years beginning to think about stocks as the income-producing asset that they will need in the future. And that's what it used to be back before 1957," he said.

But other market pundits see a much darker immediate future for stocks. 

And famed market bear Marc Faber is actually growling even a little bit louder these days.

The editor and publisher of the Gloom, Boom & Doom Report, told CNBC that stocks are likely to endure a gut-wrenching drop that would rival the greatest crashes in stock market history.

"I think we can easily give back five years of capital gains, which would take the market down to around 1,100," Faber said, referring to a level 50 percent below Monday's closing on the S&P 500. 

"The fact is, the market hasn't really been driven by genuine buying, but by stock buybacks, takeovers and acquisitions, and market leadership has been narrowing. It's not that many stocks that have been making new highs. It's quite a narrow growth of stocks that have been very strong," he said.

(Newsmax wire services contributed to this report).

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Jeremy Siegel, of The Wharton School, shares his thoughts on how earnings, election uncertainty and possible December rate hike are impacting the markets.
jeremy siegel, market, valuation, stocks
469
2016-19-23
Friday, 23 September 2016 12:19 PM
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