After suffering the worst downturn since 2008, the stock market has come roaring back so far this year. Each of the major stock market indexes has gained at least 20% from their recent lows, leading some pundits to call the beginning of the next bull market, at least by that measure. The final indicator will be if the market can reach new all-time highs.
The prospects of a recession are diminishing, and inflation is slowing, which seem to bolster that view, but some fear the market has simply run too far, too fast. However, one noted economist believes the fiscal landscape has changed, the Federal Reserve Bank's monetary policy is taking hold, and the market is headed to new heights.
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Who is Jeremy Siegel?
While Jeremy Siegel may not be a household name, he has a long, distinguished record in economic circles. He's the Russell E. Palmer Professor of Finance at the Wharton School of Business, and his bio says he's a "world-renowned expert on the economy and financial markets." Siegel is also the author of the award-winning investing classic Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, named one of the 10 best investing books of all time by The Washington Post.
He has a Ph.D. in Economics from MIT and received the highest ranking among business school professors by BusinessWeek magazine. Siegel is a senior economic advisor at WisdomTree Investments and is a frequent commentator on CNN, NPR, and CNBC, among others. So when it comes to the economy, Siegel is an undisputed authority.
A strong economy
In his weekly message about the state of the economy, titled The Beat Goes On, Siegel recently posited that the stock market's strong performance will continue, fueled by a robust economy. He cites a number of factors that support his contention:
- Retail sales were better than expected, illustrating the resilience of consumer spending.
- The Purchasing Managers Index (PMI), which measures spending by business, remains strong.
- Weekly jobless claims, which measures new applications for unemployment benefits, has remained subdued, suggesting no increase in layoffs.
- There's been a seismic shift in confidence among business executives.
Based on this combination of factors, Siegel believes that the Federal Reserve Bank will pause its interest rate hikes when it meets later this week. Furthermore, the strength of these economic indicators will provide "positive momentum" for the stock market.
Historically, the biggest contributor to stock market gains over the long term is corporate profits, and recent results suggest the rally could continue. For the second quarter -- with 499 companies of the S&P 500 reported -- 79% generated results above analysts' consensus estimates, while only 16% reported below expectations, according to data supplied by the London Stock Exchange Group (LSEG) and the Institutional Brokers' Estimate System (IBES).
While Siegel says he likes "the valuations of dividend stocks more than the valuations of the tech-heavy Nasdaq," he sees the "artificial intelligence (AI) narrative dominating enthusiasm."
That's not to say there aren't challenges. Oil prices are stubbornly high, the United Auto Workers are now on strike, and the potential for a U.S. government shutdown looms -- each of which could potentially derail economic growth.
Despite those potential stumbling blocks, Siegel believes the market's overall upward trajectory will continue. "I don't see this stopping anytime soon," he said.
What does this mean for investors?
The clear takeaway for investors is that the current market rally will likely continue.
That said, investors with a long-term mindset shouldn't concern themselves too much with the day-to-day machinations of the stock market. Why? Over the past 50 years, the stock market has, on average, returned 10% annually, though returns can vary significantly from year to year, and there's simply no way to know which direction a stock will move during a given period.
Those looking to generate the returns of the overall market without the risk of investing in individual stocks can buy shares in an exchange-traded fund that tracks the S&P 500, including the Vanguard S&P 500 ETF (VOO 0.07%) and the SPDR S&P 500 ETF Trust (SPY 0.09%).
