Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a Senior Investment Strategy Advisor to Wisdom Tree Funds. His book, Stocks for the Long Run, now in its fourth edition, is widely recognised as one of the best books on investing. It is available via the link below. He is a regular columnist for Yahoo Finance and is frequently quoted in the financial press.
I spoke with Siegel on Monday, December 10.
In our last interview, on November 29 of last year, you said that the fair market value of the S&P was 20 to 30% higher than it was priced at that time. It closed at 1,192 that day. It closed last Friday at 1,424, which is 19.5% higher, at the lower bound of your estimate. Very few people predicted that the market would perform as strongly as it did. Congratulations.
The market in 2012 certainly did better than in 2011. Actually, on the economic front, this wasn’t a particularly good year, with Europe getting worse, China slowing down, Japan struggling and our GDP basically under 2%.
Where do you see the fair value of the S&P now, relative to its current level?
We’re going up. We could get another 15 to 20%. 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.
What resolution of the fiscal cliff do you think is priced into the market now, and what outcomes do you think would drive the market higher or lower?
As we always know, when there’s uncertainty, the market tends to price in almost the worst possible outcome. If we get a compromise on the top income tax rates, which I will say is halfway between 35% and 39% – say something like 37% – and we get a compromise on capital gains tax rates, which are now 15%, rising to 17.5% instead of 20%, and a compromise on dividends, that would be enormously favourable for the market. Even tax rates splitting down the middle would be enormously favourable. But even if we go to 20% on the capital gains rate and even if we go to the top marginal income rates, I still think we’re going to have a good market.
My feeling is that we’re not going to go to the top rates on dividends. There’s a lot of support among Democrats to keep the dividend tax lower. We’ll see how low it will be. It would be very disappointing if the tax rate on dividends went back up to the marginal income rates that we had before the Bush tax cuts.