Being Amazed by the Market
Jeremy Siegel, HON’80
Wharton Professor

At 73, Professor Jeremy Siegel, HON’80, is not slowing down. He enthusiastically spoke to a live audience, fielding multiple questions, and covered a wide range of subjects on the financial markets. His first question to the audience was, “So, how many of you bought during the 20% off, after-Thanksgiving sale — in stocks?”

Professor Siegel spoke to a full house at the Grand Hyatt near Grand Central, hosted by the Wharton School’s More Than Ever Before Tour.
His first chart was on long-run returns of various asset classes, showing a “best fit” regression through the stock line of 6.7% per-year returns after inflation. He had recently checked the first edition of his book, Stocks for the Long Run, based on data through 1992, which also showed 6.7% per year. Professor Siegel said, “The consistency of that number over time is remarkable, starting in 1802 until 2018. That means that your wealth in stocks has almost doubled after inflation, every decade, on average for over two centuries!”

When one compares asset classes, in every country in the world, stocks have done better than bonds, gold or other assets. Siegel shared, “It might surprise you that America is only the third-best-performing stock market after inflation, in U.S. dollars, over the past 118 years. The best-performing stock market was South Africa, followed by Australia.”

He delved into detail, as if we were in his class, on where the U.S. stands today. “The price/earnings ratio over the past 65 years is 17.07. We’re just about there now. In March 2000, the P/E was 30 on the S&P 500.

“If we want to find out what we will earn, then flip the price/earnings ratio. The earnings/yield of the market is an excellent predictor of long-run market returns. Over the past 140 years, the P/E ratio has been 15. If you flip that number to 1/15, it equals 6.7%. Have you seen that number before? “A student once told me, ‘Dr. Siegel, that is such a coincidence!’ It’s not a coincidence. That’s what theory tells us, that the earnings yield should be the real return on stocks!”

Siegel covered a wide swath of materials: Index funds, effect of buy-backs on earnings per share growth after inflation, causes of low interest rates, effect of transaction costs, the premium of stocks over bonds, treasury bonds as the ultimate hedge against a declining stock market, when politicians will deal with the U.S. federal debt, and why value stocks and emerging markets are worth considering.

Siegel did not shy away from taking several strong stands — for example, that the CAPE Shiller ratio fails to predict earnings. In May 2009, Bob Shiller’s CAPE ratio predicted that the Dow average at 8,500 was overvalued. Since the CAPE Shiller ratio predicts 10 years of future returns, Siegel said it was “one of the worst calls in stock market history.”