Jeremy Siegel: Bull market will continue for the long run

S&P 500 remains 20% below trend line, says noted equities booster

Feb 6, 2011 @ 12:01 am

By Andrew Osterland

This bull market has legs.

Jeremy Siegel, the professor of finance at The Wharton School of the University of Pennsylvania renowned for his encyclopedic knowledge of stock and bond markets around the world, told investment advisers at the TD Ameritrade Institutional conference Thursday that the rally in stocks still has a ways to go.

Despite the strong run-up in equity prices since the market bottomed in March 2009, the S&P 500 remains 20% below the long-term trend line, he said. Of course, Mr. Siegel's long-term trend line is slightly more expansive than most: His statistical analysis dates back to the early 1800s.

According to Mr. Siegel, bull markets tend to rise significantly above the trend line before reversing course. Thus he thinks that stocks remain a very good buy for investors.

“This market is not overvalued. The next several years are going to be good for stocks,” Mr. Siegel said.

U.S. stocks have had an average annual real (after inflation) return of 6.7% between 1802 and 2010, compared with 3.6% for bonds. While there are good decades and bad for all asset classes, Mr. Siegel thinks that the long-term trends will hold true for equities.

“No other asset class enjoys long-term returns like stocks,” he said.

The big reason for Mr. Siegel's optimism is the surging growth in corporate earnings.

The long-term price-earnings ratio of the S&P 500 is 15. And in periods when the interest rate on the 10-year Treasury bond is below 8%, the average P/E of the index rises to 19.

With current estimates of S&P 500 earnings for this year topping the record $91.47 set in 2007, the index will surpass 1,800 if the trend holds true.


But what if the run in stocks over the past year and a half is a short-lived aberration in a multidecade bear market? In the 35-year period between 1946 and 1981, stocks actually produced negative real returns.

The P/E on the S&P 500 hovered in single digits for much of the 1970s and 1980s. That won't happen this time around, Mr. Siegel said.

“We won't go to single-digit P/Es like we did in the "70s and "80s,” he said, adding that the major reason is that double-digit inflation is unlikely in the near future. Add in the fact that the huge sell-off in stocks in 2008 left the market 39.4% below the long-term trend line — the fifth-largest gap since 1865, according to Mr. Siegel — and there is nothing but upside to come.

“In 2008, people were telling me that this feels like the 1950s, but I told them, "Don't lose the faith. Stocks are going to come back,'” Mr. Siegel said.

The same can't be said for municipal bonds, he said.

Although, Mr. Siegel said that muni bonds have “been whacked more than they should have been, and there are some good yields to lock in,” he warned that tax-exempt debt won't give investors the inflation protection that they would get from stocks.

“If your clients are worried about inflation, dividend-yielding stocks are the best option,” he said.

Likewise, Mr. Siegel takes a dim view of gold.

“Unless there is a collapse in the global economy or hyperinflation, neither of which is likely, gold buyers today will be disappointed in five years,” he said.

E-mail Andrew Osterland at


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