Wharton professor Jeremy Siegel says predictions of a lost decade in the stock market are unfounded and 6% annual returns are likely after inflation

Wharton professor Jeremy Siegel
Wharton professor Jeremy Siegel is a long-time market commentator.REUTERS/Steve Marcus
  • Wall Street's growing chorus of a lost decade for stocks is unfounded, according to Wharton professor Jeremy Siegel.

  • Siegel believes the stock market could deliver annualized returns of 6% net of inflation going forward.

  • "If you're a long-term investor I would absolutely buy now. I think these are absolutely great long-term values," Siegel said. 

From Stanley Druckenmiller to Ray Dalio, there's a growing chorus on Wall Street that thinks the stock market is about to embark on a "lost decade," in which returns are virtually flat, similar to the mid-2000s or the 1970s.

Their concerns are valid when you consider the multi-decade highs in inflation, elevated geopolitical tensions with Russia, and surging volatility in global currency markets.

But Wharton professor Jeremy Siegel believes those views are unfounded, as he still expects healthy returns going forward for the stock market, according to an interview with CNBC on Friday.

"I disagree with that completely that the Dow or S&P 500 would be flat [over the next decade]," Siegel said, arguing that there is great value in current stock market prices.

"When you're talking about 16x earnings, and even if they're clipped by a recession, I think there are absolutely excellent values," Siegel said, though he admitted that in the short-term, "anything can happen... Could it go down more? Of course, in the short run. In bear markets it has gone down more."

In the short-term, investor concerns are increasingly focused on what the Federal Reserve does with interest rates as they continue to aim for lower inflation. Siegel thinks the Fed would be better served by looking at current market data rather than lagging economic indicators.

"The Fed has to be forward looking. They have to look at what's going on in the market, in the housing market, in the rental market, in the commodities market," Siegel said, referencing the drop in prices in recent weeks and months.

But all of this uncertainty ultimately represents a great opportunity for long-term investors, given the value Siegel currently sees in stock prices.

"If you're a long-term investor I would absolutely buy now. I think these are absolutely great long-term values," Siegel said.

"To say 10 years from now we're going to have the same Dow when the earnings yields that I see on the market show that your returns are going to be probably in the neighborhood of 6% per year after inflation. That's a bit below the long-term average, but still much better than bonds, and certainly far above a flat average," Siegel said.

Another big difference between now and prior lost decades that began at peaks like in 2001 or the early 1970s is that the stock market is no longer at a peak.

"We're down 25% from the peak! You're not starting from a peak, and at that peak you're not starting at levels that too me were particularly overvalued. You're starting from a position, certainly not the cheapest that we've ever had, but certainly economic circumstances are not that negative at all," Siegel said.

Given the low unemployment rate and resilient consumer spending, Siegel is not wrong to say that the current economic circumstances look nowhere near as dire as they did during prior bear markets like in 2009.

Siegel recommended that investors take advantage of the current decline in stocks by buying index funds and owning exposure to value stocks, and to not get tempted by trying to time the stock market.

"A lot of these people say 'I see downside, another 15% [lower], and then I'm going to load up'... they all see short-term turmoil and [then] a long-term rally. My experience is when people get out and then it starts going down, they don't get back in until its much higher then the point that they get out. And that is the big danger," Siegel said.

"To try to time short-runs, even if you get out before the bottom, it's getting back in that's the hardest part," Siegel concluded.

Read the original article on Business Insider