Stock market's rally has room to run, Jeremy Siegel says

Don't sell yet, because the historic stock market run still has some fuel in the tank, according to Jeremy Siegel, professor of finance at the Wharton School. Speaking Thursday in Orlando, Fla., at TD Ameritrade Institutional's 2018 National LINC conference, Mr. Siegel shot down popular fears about stocks and bonds as a way of making his point that stocks will finish the year between "0 and 10%" higher. Mr. Siegel confessed that last year at this time he made the exact same prediction. The S&P 500 Index gained nearly 20% last year. But this year, the senior investment strategy adviser at WisdomTree Investments is working against a more bearish backdrop that includes rising interest rates, higher stock valuations and a flattening yield curve. On stock valuations, Mr. Siegel referenced the peak period of the late 1990s during the tech bubble and said, "Over the last five or six years, there has been no bubble." "The P/E of the Nasdaq in March 2000 was at 600 times," he said. "That's a bubble." Another way of putting the current price of stocks into context, he added, is to compare them to bonds. "Stocks are a bit expensive, but nowhere near as expensive as bonds." (More: Dow surpasses 25,000 for first time as bull market storms into 2018) Mr. Siegel added that lower bond yields will continue to play a role is driving stocks higher, to a point. "The bull market is ultimately due to earnings and interest rates," he said. On Federal Reserve policy, Mr. Siegel expects to see "three or four hikes this year," pushing the short-term rate to between 2% and 2.25%, and he expects the Treasury long bond to be around 3.25% at the end of the year. While he anticipates a slightly flatter yield curve as the year progresses, Mr. Siegel does not believe the bond market is at risk of an inverted yield curve, which happens when the yields on longer-term bonds are lower than the yields on shorter-term bonds. Inverted yield curves typically lead to recessions. "I see no recession in the cards for the next 12 months," he said. What he does see is a possible stock market correction during the second half of the year, which might be triggered by higher interest rates or a fallout from the tax cuts, because the biggest positive benefit will be short-lived. "The tax cut is front-loaded because it allows for expensing of capital equipment," Mr. Siegel said. "It will drive prices early but it won't last." (More: 2018 outlook on equity investing is mostly bright)