Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. He's also author of Stocks for The Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. He recently talked with David and Tom Gardner on The Motley Fool Radio Show, sharing his thoughts on the state of the housing market, the stock market, and more. This is the first of three parts.
TMF: Let's kick things off by getting your quick take on the state of our stock market.
Siegel: Well, we have had a great first half. I think it is going to be tougher sledding in the second half and let me tell you why. I don't think it is going to be a question of earnings coming through. I think they are going to come through quite well. I think it is a question of interest rates. I think the market is going to fight against rising interest rates and have an upward bias in the second half but not as much as the first.
TMF: If interest rates rise what sectors become interesting?
Siegel: Well, one could say beware of the home builders and anything connected with the housing market. That red-hot market has really been pushing the economy over the last year or so and will have to cool somewhat. I've already got some information that, just as a result in the surge in interest rates, refinancing has just about died to zero. So people won't be cashing out as much, but it does mean that other sectors of the economy have to be doing better.
TMF: So, does Sun Microsystems
Siegel: (Laughing.) No. I don't do analysis on individual stocks. I do think a lot of the tech stocks have already run up in anticipation of this, so I think we are going to have a super-good recovery on the whole. I am still a little cautious on that sector.
TMF: Jeremy, what is your take on the housing market? You just talked about how rising interest rates will hurt refinancing, but what about homes overall?
Siegel: Well, again we have had great increases in house prices. I think that that has got to slow down. In fact, one could even say come to a halt. When we go back through history we do see there are periods of surge followed by soft periods or flat periods. I think this tremendous rise in price -- the affordability index has gotten so high because interest rates are low.
If interest rates now start edging up, that affordability index will move down, so if you are thinking about selling your house, maybe right now would be a good chance to do it. Of course, what are you going to do? You are going to buy another house and then you get it on the other side. But nonetheless, I do think that the big rise in home prices is over.
TMF: You said "affordability index." Is that an actual index that I am not following?
Siegel: Yes. "Affordability Index" is put out by the government. It basically measures the price of the home relative to the cost of getting a mortgage on it. So home prices have gone up, but the interest, the mortgage cost has gone down so much that affordability has risen. Now we might have home prices not going up very much, but if interest rates rise, the cost of mortgages will go up and that will mean affordability will tend to go down. And that puts downward pressure on home prices.
Tomorrow, Professor Siegel assesses the near-term potential of the stock market.