Jeremy Siegel, the Wharton finance professor best known for the investment bestseller Stocks for the Long Run, sees no reason why the stock market can’t go up by 10% during 2016.
Wait, you might say, Siegel is a famous stock bull. Of course he would say that. But his reasoning is more sound than you might think, and at a minimum it represents the virtues of keeping an open mind and a steady hand on investments that have served us well so far.
The fact is, diversified stock holdings are good investments. Over long periods, they tend to rise more consistently than bonds, gold or cash. Siegel is famous for establishing exactly this argument in his books and lectures.
He was being interviewed on CNBC in part because the first trading day of the year was so scary. The S&P 500 opened sharply lower on Jan. 4 on news of a stock rout in China which had spread to Europe.
Things improved on Tuesday and then fell back the next day. But think about that for a minute. Three days of trading. It’s almost nothing.
It’s the start of the year, so naturally all kinds of suspicion is heaped on the calendar. But the problems started in China. Their new year isn’t until next month. Still looking for a connection between the date and your stock investments? You shouldn’t bother.
But wasn’t it especially bad news? Not really. The problems in China’s economy are well known and ultimately accounted for in current stock prices. A slowing economy there is hardly surprising, after all.
In fact, as Siegel posits, our own Federal Reserve is likely to be very cautious about raising interest rates as a result of a slowing China, and that bodes well for U.S. stocks. “I actually think we’re going to get 8% to 10% this year,” Siegel told CNBC. “I don’t think it’s going to be all that bad.”
A variety of factors, China among them, will prompt the Fed to hike rates more moderately, “maybe two rate hikes” instead of four during 2016, Siegel said. That should bolster the stock market.
Nothing about such an outcome, if it were to happen as Siegel guesses, would be a surprise. Fed Chief Janet Yellen has taken great pains to say that the speed of any rise in the U.S. interest rate would be “data dependent,” a wonky term that simply means “we’ll decide as we go.”
“I do think that the economy is going to better than a lot of people fear,” Siegel continued. “Low inflation and the fact that we’re not going to have a lot of growth is going to stay Yellen’s hand, to keep rates more moderate.”
Does Siegel have a crystal ball? No, nor do I and nor does anybody else. But retirement investors should take any new information for what it is — new information, and thus already part of the live, minute-by-minute pricing process that goes on in the stock market every trading day.
It’s easy to assume that the rise in U.S. stock valuations has to be over and thus the only future movement must be downward. Unfortunately, it’s just that kind of market timing sentiment that tends to keep investors out of the stock market during periods when share prices rise, only to get back in as they decline.
Once you miss those gains, they are gone forever. The better answer is to own appropriate exposure to U.S. stocks and to stay the course, whatever the headlines and whatever arbitrary calendar date happens to go by. You’ll be better off in retirement for sure.