Stocks, Bonds and Future Returns Prof. Jeremy J. Siegel ~ The Wharton School CFA Forecast Dinner, February 9, 2017

Transcription

1 Stocks, Bonds and Future Returns Prof. Jeremy J. Siegel ~ The Wharton School CFA Forecast Dinner, February 9, 2017

2 Important Information This presentation represents the opinion of Jeremy Siegel and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. It should not be deemed an offer or sale of any investment product and it should not be relied on as such. This presentation is not to be otherwise used or distributed. Professor Jeremy Siegel is a Professor of Finance at the Wharton School of the University of Pennsylvania and Senior Investment Strategy Advisor to WisdomTree Investments, Inc. and WisdomTree Asset Management, Inc. The user of this information assumes the entire risk of any use made of the information provided herein. None of Professor Siegel, WisdomTree Investments, WisdomTree Asset Management or the WisdomTree ETFs, The Wharton School, nor any other party involved in making or compiling any information in general makes an express or implied warranty or representation with respect to information in this presentation. 2

3 Definition of Major Asset Classes / Indexes The source data on the return series for the major asset classes can be found in Professor Siegel s book Stocks for the Long Run, 4th edition. Professor Siegel compiled his own proprietary indexes on each asset class and updates each data series from the book to reflect most recent periods. Stocks: The total returns after inflation on the broadest index of stocks available at the time. (Stocks-real-total return index: ) Bonds: The total returns on an index on U.S. government bonds after inflation. (Bonds-real-total return index: ) Bills: Total returns on U.S. Treasury Bills after inflation. (Bills-realaccumulative index: ). Gold: The value of 1 dollar of gold bullion after inflation. (Goldreal-price index: ) Dollar : The purchasing power of one US dollar. (Money: ) Index performance assumes reinvestment of dividends, but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in Fund shares. 3

4 Risks Note: Stocks are typically subject to increased risks compared to U.S. Treasury Bills while bonds are subject to adverse consequences associated with rising interest rates that cause a decline in a bond s price. A U.S. treasury bill has less risk than bonds because of its very short-term nature and the U.S. government is considered a good creditor. Gold is often invested in as a hedge for inflation, but there is market risk that gold prices fluctuate widely. The value of the U.S. dollar depreciates over time with inflation, so the primary risk is inflation risk. 4

5 Asset Returns 5

6 Total Real Return Indexes January 1802 December 2016 $10,000,000. $1,000,000. $100,000. $10,000. $1,000. $100. $10. $1. Stocks: 6.7% Real Bonds: 3.5% Real Bills: 2.6% Real Gold: 0.5% Real Dollar:-1.4%Real STOCKS BONDS BILLS $1,136,042 $1649 $268 GOLD $2.97 $0.1 DOLLAR $0.049 $ Source: Siegel, Jeremy, Stocks for the Long Run (2014), With Updates to

7 Annual Stock Market Returns Updated through December 2016 Real Returns Long- Term Major Sub- Periods Post-War Periods % I % II % III % % % % % % Source: Siegel, Jeremy, Stocks for the Long Run (2014) with updates to

8 Worldwide Stock, Bond, and Bill Returns Source: Siegel, Jeremy, Stocks for the Long Run (2014) with updates to

9 Global Valuation 9

10 P-E Ratio on S&P 500, Median PE over period = PE 30 Avg PE when Interest Rates <8% = 19 Double Digit Interest Rates Source: Bloomberg 12/31/ /31/2016 You cannot invest directly in an index 10

11 Historical P-E of Nasdaq 600 Times Earnings March 2000 Source: Bloomberg 12/31/ /02/15 You cannot invest directly in an index 11

12 Definitions of S&P 500 Earnings Firm Reported: Most liberal, excludes asset impairments, severance costs, Cash plant closing costs, litigation expense, pension value changes, and stock option expenses; Est = $114.19, Est $ S&P Operating: Excludes some asset impairments (except for financials) and severance costs; Est = $108.52, Est = $ GAAP: Mandates write-downs and asset impairments, whether sold or not; Does not permit write-ups unless sold = $86.53; Est = $98.18, Est 2017= $ Source: S&P, 2015, 2016, and

13 PE Ratio of S&P Average P-E Ratio 15. Source: Stocks for the Long Run (2014), updated 2016 You cannot invest directly in an index 13

14 What do PE Ratios Mean for Returns? Earning Yield (E/P) is good predictor of long-term real returns. That is why 140 year average of 15 PE corresponds to 1/15, or 6.7% real rate of return on stocks. With S&P at 2290 (Feb. 6), stocks are selling for about 21 times 2016 S&P 500 operating earnings of $ and 17.5 times 2017 estimated operating earnings of $ PE ratio of 18 forecasts a real return of 5.6% for stocks (and about 7.5% nominal return with 2% inflation). This is more than 5% over Treasury bonds, a margin economists call the equity risk premium. This premium is also well above the historical average of 3% to 3 ½%. Even a P-E of 20 forecasts a 5% real return for stocks (7% nominal return, given 2% inflation). This is still well above the historical margin of stocks versus bonds. 5% Returns divided into 2% dividend, 2.5% buybacks, 0.5% capex. Source: S&P July 29, 2016, 2015, and February 6, 2017 You cannot invest directly in an index 14

15 World P-E Ratios Source: Bloomberg 02/08/2017 You cannot invest directly in an index 15

16 Forward PE-Ratios US EAFE EM Source: Thomas Reuters I/B/E/S 2017 You cannot invest directly in an index 16

17 Forward P-E: Emerging Economies Source: Thomas Reuters I/B/E/S 2017 You cannot invest directly in an index 17

18 Shiller CAPE ratio Prof. Robert Shiller of Yale invented a Cyclically Adjusted P-E ratio to judge valuation of the market. He averages past 10 years of Earnings to compute his PE ratio. P-E ratio December 2016 was 28.1, 69% above 16.6, the 140-year mean of the series. CAPE methodology forecasts forward 10 year real returns on stocks of only 2%, about 4 ½ percentage points below longrun average. *Robert Shiller, Yale Economics as of 3/31/

19 Cyclically Adjusted Price to Earnings Ratio Shiller CAPE Ratio Overvalued Mean Undervalued Source: Siegel, The Shiller CAPE Ratio: A New Look May

20 Is the CAPE Ratio Too Bearish? In 428 of the 434 months from 1981 through 2016, the actual 10-year real returns in the market have exceed forecasts using the CAPE model. There have been only 9 months since January 1991 when the CAPE ratio has been below its mean. CAPE methodology called the US stock market overvalued in May 2009, when the Dow was 8500 (now 20,000) and the S&P 500 was 919 (now 2250). Source: Siegel, The Shiller CAPE Ratio: A New Look May

21 Real Per Share Reported Earnings (Log Earnings) Real Per Share Reported Earnings Real Per Share Reported Earnings Real Per Share Reported Earnings Great Depression *Real Per Share Reported Earnings is the per-share reported earnings adjusted for inflation. Source: The Shiller CAPE Ratio: A new Look J. Siegel May

22 Real Per Share Reported Earnings (Log Earnings) Reported, Operating Earnings and NIPA* Profits Real Per Share Reported Earnings Real Per Share Operating Earnings Real Pre Share NIPA Profits NIPA Profits 1 S&P Reported Earnings Source: The Shiller CAPE Ratio: A new Look J. Siegel May 2016 *NIPA: National Income and Product Accounts on S&P 500 Earnings Start dates based on data availability. 22

23 2.5 CAPE Ratio Relative to Long-term Mean Shiller Total Return Portfolio CAPE Reported Earnings TR (RPT) CAPE Operating TR Earnings (OP) 2.0 CAPE NIPA TR Profits 1.5 RPT OP 1.0 NIPA Source: The Shiller CAPE Ratio: A new Look J. Siegel May

24 Just Published May/June 2016 FAJ 24

25 Collapse of World Interest Rates 25

26 Ten-year TIPS yield % 3% 2% 1% 0% -1% Source Bloomberg as of 03/07/2016 You cannot invest directly in an index 26

27 Low Interest Rates Worldwide Zero (or negative) interest rates are not caused by Central Banks. They are due to real economic forces, such was low inflation, slow economic growth, high private and regulatory demands for liquidity, increased risk aversion, and the negative beta of Treasury bonds with risk assets. In 2014 Bill Gross extended the new normal to interest rates, and termed it the new neutral. Neutral is the term the Fed gives to an interest rate that is neither simulative or contractionary, but at equilibrium. He claimed that the new neutral was 2% (0% real, 2% inflation) Fed funds, far below the 4.% to 4 ½ % that the Fed had regarded as its long-term target. This is strongly supported by empirical evidence. Source: PIMCO, Bill Gross market commentary, June

28 Beta of Nominal Treasuries Plummets Source: Monetary Policy Drivers of Bond and Equity Risks, John Campbell. Pfluger and Viciera, June

29 Fed Lowering Fed Funds Targets One FOMC member, James Bullard, President of Federal Reserve of St. Louis thinks new neutral is much lower, 70 bps. 1 We are there now! Over past 3 years, Fed has reduced long-run neutral estimate from 4% to 4.5% to about 3% now. Bottom Line: Long Bond may hit 3% by year end, 3.5% at end of cycle, Fed funds to 2% to 2½%. Very poor income prospects from fixed income. 1 Source: James Bullard, 8/18/

30 Dividend Income beat inflation Consumer Price Index (CPI) S&P 500 Dividends S&P 500 Dividends Inflation Entire Drop of Dividends Due to Financial Sector $2553 $ % 3.75% % 6.22% % 2.42% Data as of December 31, 2016 Dividends 846 CPI $100 Data from December 31, 2016 Source: Siegel, Jeremy, Stocks for the Long Run (2014) with updates to

31 Total Real Return Indexes January 1802 December 2016 $10,000,000. $1,000,000. $100,000. $10,000. $1,000. $100. $10. $1. Stocks: 6.7% Real Bonds: 3.5% Real Bills: 2.6% Real Gold: 0.5% Real Dollar:-1.4%Real STOCKS BONDS BILLS $1,136,042 $1649 $268 GOLD $2.97 $0.1 DOLLAR $0.049 $ Source: Siegel, Jeremy, Stocks for the Long Run (2014), With Updates to

32 Important Information You cannot invest directly in an Index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the Index. Index performance assumes reinvestment of dividends, but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in Fund shares. Such fees, expenses and commissions could reduce returns. The S&P 500 Price/ earnings ratio is defined as the S&P 500 s net income per share divided by its index level. The S&P 500 Index is a capitalization-weighted index of 500 stocks selected by the Standard & Poor's Index Committee designed to represent the performance of the leading industries in the United States economy. WisdomTree Investments, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Certain index performance information utilizes data provided by the Center for Research in Securities Prices, Graduate School of Business, University of Chicago, also know as CRSP. CRSP data is not warranted or represented to be correct, complete, accurate or timely. CRSP is not affiliated with WisdomTree and shall not be responsible for investments decisions, damages or losses resulting from the use of the WisdomTree indexes or CRSP data. 32