- The Washington Times - Thursday, May 11, 2006

Strong corporate earnings and global economic growth will propel the stock market higher as the Dow flirts with the all-time record it reached in January 2000 and the S&P; 500 breaches a five-year high, according to noted Wharton finance professor Jeremy Siegel.

But gold is not a good bet for the long term, said Mr. Siegel, known for calling the bull market top in March 2000 and author of the classic “Stocks for the Long Run” and “The Future for Investors.”

“I’m concerned about commodities. I do think they are in a bubble,” Mr. Siegel said in his office in Philadelphia crammed with books, awards and photos of himself with former Fed Chairman Alan Greenspan and billionaire investor Warren Buffett.

Mr. Siegel has long been a proponent of holding stocks for the long term over other securities. But he took heat from investors after proclaiming that Internet stocks were overvalued — soon before the bear market began six years ago.

Question: These are heady times for the market. Can that momentum can be sustained?

Answer: I think so. There are two things that are very positive for stock prices. One is the tremendous earnings growth that we have seen. The number of firms reporting above expectations is very high.

Second, we have a world increase in economic activity. For the first time in more than 20 years, we have Europe, Japan and the U.S., as well as the developing countries, contributing to economic growth. … I think that will also [boost] stock prices.

Q: How does this market compare to the last bull market?

A: I think this is a much healthier market. The bull market that we had in the late 1990s was fueled by speculation in technology and Internet stocks. Today, I see much less speculation.

Q: Will we ever see a roaring bull market like that of the 1980s and 1990s again?

A: That was unprecedented in the 200-year history of the U.S. stock market. We returned 15 to 18 percent per year on average for nearly 20 years. We’ve never had that before. … My feeling is that the memory and the pain of that bubble breaking will be long-lasting on investors and keep them from getting as overenthusiastic.

Q: After years of phenomenal growth, the housing market is slowing down. What’s your take on real estate?

A: I don’t predict a crash. I don’t think it was a tremendous bubble. There were some areas in the country that probably did get overspeculated, and there will probably be a downward adjustment there; but overall, the price rise was justified by the interest rate drop.

But because rates are higher, we are probably entering a long period where real estate prices will be fairly flat.

Q: Gold prices recently reached $700 an ounce. Is that the place to be?

A: I’d say no. I’m concerned about commodities. I do think they are in a bubble. I think we have a lot of money chasing commodity funds because their returns have been so spectacular.

But precious metals have not proved to be good long-term investments. Leave them to the speculators. I think that market is dangerous.

Q: How can an investor profit from the run-up in oil prices?

A: The best way really is to own energy shares. … Now, energy has gone up tremendously, so I don’t want anyone to overweight [it].

Q: What’s your outlook on the dollar?

A: The dollar has taken a bit of a hit here and I think that that’s partly related to really short-term factors.

But in the long run, I’m not bearish on the dollar in contrast to those who worry about the very large and growing current account and trade deficits.

I see … an offsetting strength of the dollar in the desire of the booming, developing countries to hold dollar-denominated assets.

Q: What do you think the Fed should do, given inflation fears from higher energy prices?

A: We have raised interest rates dramatically. … My feeling is that that has already turned the housing market and it will turn the commodity market. Once those two sectors are stabilized, long-term inflation is under control.

The Fed has to be very careful about overtightening, going too far. They must realize, as I think they do, that it might be wise to pause and assess the situation.

Q: What’s your take on the new Fed chairman, Ben S. Bernanke?

A:I know him. I think an excellent choice.

Q: You’ve said that investors often make the mistake of buying into the fastest-growing stocks because they tend to be overpriced. You also said that the best-performing investments are found in shrinking industries and in slower-growing countries.

A: People confuse growth with return.

I found, in my historical studies, that growth stocks, particularly small growth stocks, are in fact often overpriced by the market. Even though a number of them go on to grow, the vast majority don’t live up to expectations. Sometimes slow-growing companies that are profitable and return cash to shareholders and give dividends have proved to be the best stocks in the long run.

The same thing holds with countries. The fastest-growing country over the last 20 years is China and yet it has had the worst dollar returns for investors — again, overpriced securities.

You must look at the price relative to earnings and the dividend yield.

Q: Do you see an era of declining influence and power of the Western countries?

A: I see a drop in the share of the economy that Western powers will occupy in the coming years. My own projection is that … China’s economy could be as big as the U.S., Canada, Western Europe and Japan put together by 2050.

Q: Given your projection of the importance of globalization, how should one allocate assets?

A: I’ve recommended that up to 40 percent of your equity assets should be in stocks that are headquartered outside the U.S. … We have to recognize that over half of the world’s capital today is outside the U.S., and that will be growing dramatically in the coming years.


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