August 3, 2010
The long-term trend line
Siegel has plotted a long-term rising trend line in profit levels and stock market prices going back 200 years. When stock prices get above that trend line, as they did in 2000, typically underperformance follows – and often prices drop below the trend line.
Siegel points out that when stock market prices are below the trend line, as they are today, the lesson of history is that a period of outperformance follows – although he cautions that just as stocks can stay above the historical valuations norms for long periods of time, they can also stay below them, and investors have to be prepared to be patient.
Addressing the “new normal” of lower growth
We also discussed some of the arguments by Bill Gross at PIMCO and others about a “new normal” of slower economic growth, due to deleveraging, re-regulation and a reduction in the pace of globalization.
Siegel’s response was that these are legitimate concerns, but that they ignore the impact of innovation and especially the effect of the internet. Siegel points to the internet as a transformative tool in accelerating the pace of innovation, as scientists and researchers around the world are able to work together in real time.
And he went on to say that this will inevitably lead to faster economic growth.
Communicating your views to clients
In an industry where opinion often drowns out reason, Robert Shiller and Jeremy Siegel stand out for their careful, fact-based approaches.
Which view advisors and investors favor will largely depend on their going-in biases – those who are currently negative will look to Shiller’s approach, those who are more optimistic will side with Siegel.
The good news is that these two views lay out clear parameters for the upside and downside case for stocks – and provide the foundation for a reasoned discussion about the direction of stocks in the period ahead.
In my conversations with investors, most want to deal with advisors who are generally positive but at the same time provide a balanced perspective, so don’t fall into the perma-bull “don’t worry be happy” camp.
That’s why you can’t dismiss the issues that global economies and stock markets are facing.
And with many clients, you can’t rely on just your own opinion or your firm’s research – in times like these, it’s helpful to provide support from trusted, third-party sources.
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