Stocks are marginally lower on Thursday afternoon, with the benchmark S&P 500 (^GSPC -0.73%) and the Dow Jones Industrial Average (^DJI -0.90%) (DJINDICES: $INDU) down 0.14% and 0.24%, respectively, at 1:35 p.m. EDT.
Stocks to gain 15% -- should you listen to Jeremy Siegel?
Last Friday, Jeremy "Never Met a Market I Didn't Like" Siegel, professor of finance at Wharton, told CNBC that "if we get a good second half of the year earnings-wise, then I think the market could be up 10 to 15 percent." Based on the closing price on June 30, that would put the S&P 500 at between 2,309 and 2,415 at year-end, which is even above the 2,300 forecast Siegel gave in November.
What is the professor's record with near-term market calls? (Yes, six months or even a year is the very short term for stocks.) I went back to check his year-ahead predictions for stocks for the years 2008 through 2015. The result? He was surprisingly accurate -- see for yourself (the emphasis is mine):
I consider the fair value of the S&P 500 to be approximately 2,300. That is not necessarily a forecast for the end of this coming year, but I believe we are in a permanently lower interest rate environment, which supports higher than historical valuations for equities. [Nov. 24, 2014]
The S&P 500 closed out 2015 at 2,043.94, 12% below Siegel's estimate of fair value and 2% below where it stood the day he made his forecast.
I think fair market value for the stocks today is 10% to 15% higher, and that might even be on the conservative side. [Nov. 29, 2013]
The S&P 500 rose 11.4% in 2014.
I'm on record saying that I think there is an overwhelming probability that we're going to get Dow 15,000 by the end of next year, so if the current level is 13,180, that's a 14% rise. There is a possibility -- if we get some good work done on the entitlements, if we set the tax rates appropriately -- with the housing recovery, it's very possible to get 25% next year. That would certainly be a very-good-case scenario. [Dec. 10, 2012]
The Dow Jones Industrial Average rose 26.5% in 2013 to close at 16,576.66 (but note that there was no progress on entitlements or any significant changes to tax rates).
Fair market value of the S&P is 20% to 30% higher than the S&P is today. Valuations are below average. Interest rates are below average. [ Nov. 29, 2011]
At the end of 2012, the S&P 500 was 19.3% higher than it was on the day on which Pr. Siegel gave his forecast.
So, when I look at the fair market value now of the market, I see it appreciably higher than our current levels, and I can easily see the market growing 10%-20% over 2011. [November 9, 2010]
In 2011, the S&P 500 was flat.
Today, at current levels of interest rates -- and if those rates persist -- the fair value is fairly high -- 1,300 or 1,350. I think interest rates are going to go up. That makes the fair value closer to 1,250 now. [December 23, 2009]
The S&P 500 finished 2010 at 1,257.64. But note that interest rates fell in 2010 -- the yield on the 10-year Treasury bond going from 3.84% to 3.29%, according to data from Bloomberg (the Fed Funds policy interest rate was unchanged).
I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%). [Dec. 2007]
In 2007, the S&P 500 rose 3.5%, so Siegel's forecast for 2008 price gains was 8% + (8%-3.5%) = +12%. Instead, the S&P 500 tumbled 38.5%. This forecast for 2008 looks absurd in hindsight, but he was certainly not alone in failing to foresee the carnage visited on equity markets that year.
With that impressive track record, should you listen to Siegel? No. It's clear that some of his accurate results are mainly the product of luck since the factors he cited to support his forecasts did not come to pass. But the more important question is: Why would one care how stocks will perform over the next six months? Indeed, one point on which investors should absolutely listen to the professor is the one he made in 2002, when he wrote [starts download]:
The problem with market timing is that it opens the door for many investors to do far worse than the market averages ... Market timing simply won't work for the average investor ...
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@TheLimerickKing Economists often mistake symptoms for diseases— Emanuel Derman (@EmanuelDerman) July 7, 2016