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hello I'm Jeff Brown for knowledge at
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Wharton and today once again we have
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Wharton Finance Professor Jeremy seagull
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with us for a few minutes and thank you
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again for being with us happy to be here
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Jeff well it's late January and
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everybody's getting their statements
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year end statements from 2013 and seeing
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the stupendous gains they made in the
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stock market getting ready to pay taxes
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on them and now all of a sudden we seem
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to be falling off a cliff the uh S&P
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500's down about 3% uh year-to date
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after being up 32% last year what is
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going on well it shows you how used to
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gains we are after up 32% we call down
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3% off a
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cliff I I regard it as a little bump uh
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uh no bull market goes up in a straight
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line I mean OB obviously I mean uh we
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haven't had a
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correction for which is defined as a 10%
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uh decline in the market for uh you know
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at least two years which is pretty
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remarkable now I don't think this
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current reaction is going to move that
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far but uh again um bull markets in fact
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many many technicians say it's healthy
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for a bull market to have this
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correction because it sort of blows off
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the excess bullishness that uh sometimes
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a company's Rising prices well what has
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triggered this now why now not a month
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ago or a month from now well I mean
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ostensibly it was the Emerging Markets
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you know people are saying uh again the
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tapering um you know the truth is of
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course was the tapering was announced in
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December so if markets are at least even
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partially efficient why is it reacting
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four weeks later to something that we
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knew in December uh you know we had a
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very disappointing labor market report
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uh uh earnings are coming in so so so
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uh actually the percentage that our
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beating earnings uh at least at this
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point are is actually a little bit more
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than average but the beat is a little
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less and some of the forward guidance
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isn't too good that's been a little
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disappointing because we know that the
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second half of 2013 had better economic
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growth in uh the first half so uh we
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many of us thought that maybe the fourth
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quarter would surprise us more on the
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upside but it's still early let's let's
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wait until we get more data on that so
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in some ways it just looks like people
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are looking for an excuse to sell and
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take some of those immense profits from
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last year you know the people talked
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about the bullishness in the market one
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of the indicators that I look at that
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monitors Market sentiment uh is called
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investors intelligence which for 50
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years has been looking at bulls and
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bears and indeed my my indic has reached
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20year highs uh uh just recently right
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after January when you know everyone's
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saying hey there's nothing in the way of
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this bowar you gotta get a little wor
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when when we uh we get to that
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particular Point uh because historically
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uh bull markets have climbed the wall of
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worry there's always oh I'm worried
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about this I'm worried about this that's
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one reason I'm out of the market um I
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don't think this bull market is over I
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still think there's there's there's room
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to go one of the things I'm curious
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about is that that we're beginning the
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tax season and a lot of people of course
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are sitting on big gains from last year
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I'm curious is is Raising cash to pay
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your taxes factor in this well only if
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they sold remember uh
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so uh if if they didn't sell one of the
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nice things about capital gains is you
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you can let them ride until you want to
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so it has to do with how much of that
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was was sold I I I don't think so uh you
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know taxes are really due in April of
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course if you pay quarterly you had to
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come up already with that January uh
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payment so I think it's more of of just
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the the fact that it got a little bit
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overbought a little bit over optimistic
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and they're using the bump of the
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problems in Argentina the problems in
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Venezuela turkey I think as more of an
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excuse uh than anything to uh to to take
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some profits when you uh open the hood
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and look inside at things like the PE
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Ratio and and and other gauges that
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you'd like what do you see okay what
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what I see is that our traditional gauge
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which is using the S&P 500 earnings
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against its level um is very close to
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its historical average very close to the
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average of the post World War II period
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around 16 16 and a half yes on the basis
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of of 2013 earnings we're at around 17
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right now although it's come down a
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little bit in terms of that it's a
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little bit above but it's been my thesis
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for more than a year now that uh this
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Market is going to go above its
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historical mean and the reason for that
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is the low interest rates with so little
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competition from other asset classes in
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my opinion that would lead to a somewhat
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higher valuation so to me I think this
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bull market is going to 18 to 19 times
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earnings which is another probably 10
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12% in in prices higher than they are
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today higher than they are today yes by
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when the end of the year well I I say
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that uh of course it's it's a fool
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whoever predicts short run in the market
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uh again you know we could go even much
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higher I remember on one program you
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know people say well you know I said we
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could go to 20,000 everyone said oh Dr Z
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are you predicting 20,000 no that would
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be overpriced unless we have Gang
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Busters economy in 2014 and 15 but uh we
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all know that uh you know stocks are
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often in a range of 20 25% of fair value
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and sometimes they even get outside of
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that range so I think fair value on the
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Dow is something like 18,000
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18,500 uh but obviously uh again uh it
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doesn't move in a straight line to to
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those levels you mentioned uh tapering
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and of course this debate over tapering
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has been going on since May I believe
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when is it going to start first are we
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uh placing our bets now or later is it
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built into the market so on and so forth
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but now it has has begun and I'm
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wondering uh what effect you see there
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the the argument was that all of this
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money from the FED is propping up stocks
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uh take it away stocks will fall I have
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maintained that the biggest myth of the
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market in
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2013 was that the bull market the 30%
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plus gain was all due to Fed pumping in
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uh uh money into the economy
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uh QE in other words I said hey guys you
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know on the basis of earnings alone and
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valuation relative to Alternatives I can
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completely uh attribute this rise in
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prices I don't need QE I think QE has I
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mean it certainly doesn't hurt I'm not
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going to say it hurts but I think it's
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way too
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overemphasizes its contribution to the
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great bull market that we've seen over
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the last uh two years years it really is
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the fading of the fears of another
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collapse that 2008 2009 brought on as
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the years go on we see these risk
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premiums go down oh you know there isn't
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going to be a currency collapse this
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municiple collapse a commercial mortgage
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collapse I all of a sudden people are
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saying you know the economy may not be
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great but I don't have those Primal
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fears that so dominated the market 2009
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10 and 11 and the FEDS plan to reduce
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its Bond buying program is a pretty slow
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process and then uh it will be well done
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before they get around actually raising
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short-term interest rates are you
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comfortable with the pace at which these
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things are I am and even that pace isn't
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in uh isn't in stone I expect them to
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continue on the1
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billion uh uh tapering uh at uh at this
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week's meeting um despite the bad
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employment report report that we
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had however let me let me say if the
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markets go down further and we get some
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um further poor data surprisingly low
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data uh I would say that there's a very
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good chance at the March meeting now
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that that is if this occurs for them to
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Halt the
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tapering uh and I don't expect that to
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happen I I think we're going to see a re
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acceleration of the recovery but but
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again no one should think that uh you
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know this pace is in stone it isn't um
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uh uh it can respond any way to what
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actually happens in the economy and
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we're just days away from the handoff
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from Ben bernacki to Janet Yellen is
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that a significant event it it is for
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them obviously but does it matter to the
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markets well I I think the markets have
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now reconciled themselves uh are are
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certainly they're factoring that in uh I
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I I mean I think Janet Yellen is
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competent I think she is a very very
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good choice I do think she's on the
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doish side I think there's no question
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that push comes to shove but she's also
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a good listener and she's a very smart
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woman and she's not and she knows that
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the FED has a inflation Target and it's
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not going to violate that inflation
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Target by any significant amount so uh
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again you know she is only just like
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Bernan and Greenspan before him they are
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only one vote of 12 on the open market
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committee and so there's no veto power
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uh certainly they they hold sway uh
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their argument and their position is
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certainly important but uh I don't think
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the bank presidents who have had no
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qualms about speaking out when they are
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concerned about uh uh inflation of or
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over stimulus uh they they will
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certainly have their uh voices uh felt
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if they think that Yellen is moving too
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much to the doish side how does the
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economy look to you is it getting
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stronger as it seems to be I still think
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so despite you know the fact that we you
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know again had that uh poor employment
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report for for uh the last month um in
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you know December I I think we have a
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chance for three and a half% plus even
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in GDP growth for
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2014 um uh again the better markets the
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better I think finally the the balance
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sheets of the consumers with the rise of
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the housing market the rise of the stock
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market has now pretty much repaired
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itself and that should give a boost to
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consumer confidence um that could also
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boost business Capital spending which
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has been also very very sluggish uh and
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with housing moving up to I think over a
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million units at an annualized rate on a
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monthly basis I think that that has the
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capability of giving a 3 and a half% or
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plus economy now again that certainly
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may not happen and I have been over
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optimistic on economic growth over the
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last two years but I think the stars are
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better aligned for such a um an
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acceleration in this year one of the
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elements of consumer confidence of
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course is jobs and whether you think
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you're going to lose your job or your
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chances of getting one if you have you
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think the job situation is going to
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improve well I I think the fear of
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losing your job has been gone down for
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five years we've seen the unemployment
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go go down from 10% down to
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6.7% so uh uh and we have seen net
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hiring by firms it's always going to be
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present um and uh there's there's always
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firms that are going to be cutting back
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but you know 200,000 jobs and in the
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private sector actually the the job
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growth that we got um over the last 12
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months even with that PO December report
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uh has been fully as month much as we
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had in
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2003 four five and six uh before the
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crisis occurred it's a little bit less
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than we had in the booming uh you know
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uh 2000 uh period 1990s to 200000 period
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but still the growth has been decent so
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I I think the labor Market's going to be
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fine and that that's the private Market
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one of the problems is government
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government cutbacks have been hurting
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these overall numbers question about it
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I mean this is the first time really
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ever that we've had a
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sustained uh actual slightly negative on
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average balance of government numbers
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government was always adding 30 and 40
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if it wasn't the federal it was the
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state and local uh boosting it I mean
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Bernan has made that in some of his
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speeches uh you know again toward the
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end of his term saying this recovery
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given the contraction of government um
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has actually uh not been
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uh that bad and so if we you know assume
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that government's contraction will slow
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we're not going to have the uh uh
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sequestering that we had before um not
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quite as severe the movement towards
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that I mean it's it's going to stay in
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place but it's that contraction is going
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to be gone uh that would neutralize the
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government as being a decidedly negative
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factor uh and let the private sector
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carry the economy forward
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uh unemployment upwards of 6% is the
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kind of thing that used we used to look
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at with absolute horror and and I
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suppose many of you still do but if you
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break down the number uh it's not that
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bad among those with college degrees
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it's really people with less than
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college and less than high school that
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are making up it's always the truth
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that's you know that is always been the
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case the better educated the much lower
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the Unemployment uh rate is the Fed now
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regards about 5 a half% to be 5
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355 to be the long run unemployment rate
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now if we were talking in the 60s we'd
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probably say it's three and a half to
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four but various factors have raised
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that over time um uh so I say five and a
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half so at 67 we're only we're between
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one and one and a half percentage points
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above what the FED thinks is the the
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long-term unemployment rate many of the
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people who Lo who have less education
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and lost their jobs uh during the crisis
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may have lost jobs sooner that they
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would have lost over the years anyway as
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things change I'm just I guess really
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concerned are they ever going to get
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those jobs
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back you know that the job market is
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changing it's changing even for some
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trained people with the rise of
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Technology being able to substitute uh
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for it uh you know the low- skill jobs I
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don't think are coming back I mean um uh
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there's just tooo much too many people
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around the world and with technology and
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communication being so easy to bring
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that to the four that they can take over
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those low skill jobs and produce the
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goods and ship them or even do the
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services by uh uh you know remote
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telephone centers that we have uh in in
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the less developed countries all sorts
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of services are are going to be
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outsourced so you have to find your
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Niche about you know what kind there's
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always gaps in Services it's always
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areas where the people who are gaining
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from the technology want to spend I mean
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there's been a restaurant boom people
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younger people are are enjoying going
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out I mean these are these are the type
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of service areas that are expanding and
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there and there will be others so again
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it's a dynamic economy but the old
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factory job even with
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manufacturing stabilizing uh the old
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manual labor job except maybe in the
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healthc care area where people might
00:16:33
have to have some you know personal uh
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uh assistance uh is is probably not
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coming back let's switch for a second
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and look at the bond market and the the
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of course when interest rates go up
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people don't want those older bonds that
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pay less and so you can lose money on
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your bonds uh is that something we need
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to worry about today and how does that
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work into an Investor's thinking about
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asset allocation in a portfol
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well think of what happened last year I
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mean we had a bad Bond Mar Rising
00:17:03
interest rates and a really good stock
00:17:04
market now I think this stock market
00:17:06
will be good this year not as as good as
00:17:09
last year but that was certainly
00:17:11
spectacular I think we can see a 10 to
00:17:12
15% return at the end of this year for
00:17:16
stocks I still think you're at big risk
00:17:18
with bonds even though this first two or
00:17:19
three weeks have been great for bonds
00:17:22
bounced back from just over 3% on the
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10e down to 27 uh with this uh you know
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a little bit of a pull back on risk the
00:17:30
Emerging Market crisis which I think uh
00:17:34
stimulated a little bit of oh my God I
00:17:36
remember 1997 maybe you remember Jeff
00:17:39
that the Asian crisis remember that
00:17:43
really whacked the market and I think a
00:17:46
few of the older Traders and those with
00:17:48
a little bit more gray hair like we have
00:17:51
said oh just a minute I hope this isn't
00:17:53
the start of that um and I think that
00:17:56
that that's causing a little bit of that
00:17:57
anxiety we're seeing in the the market
00:17:59
today so uh ending with something
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practical the investor who has just
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finished 2013 with big gains in his
00:18:06
stock a portion of his portfolio is
00:18:08
thinking now about reallocating
00:18:10
rebalancing as they
00:18:12
say should they be looking uh to get
00:18:15
back to their original goal or should
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they be saying the bond market is a
00:18:19
little too scary maybe I won't allocate
00:18:22
as much to bonds what do you do I mean I
00:18:24
still don't think bonds are going to be
00:18:26
offering really positive return
00:18:27
long-term bonds you certain you can get
00:18:30
the interest rate but at interest rates
00:18:31
of 3% the price Falls 3% and you've
00:18:35
wiped that out I still think it's going
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to be negative returns for bonds we know
00:18:40
it's zero for money markets not much
00:18:42
change going to be this year maybe 2015
00:18:44
a little more but but not this year and
00:18:47
your alternative still and if you want
00:18:49
income as we've been saying for so long
00:18:52
there are very good dividend paying
00:18:54
stocks that are yielding 3 4% there are
00:18:57
many dividend mutual funds funds
00:18:59
exchange traded funds Etc that
00:19:01
specialize in that and you're going to
00:19:03
get that growth because Dividends are
00:19:05
growing 10 to 12 to 14% a year one of
00:19:08
the strongest dividend growths we've
00:19:10
actually seen Jeff uh and uh in terms of
00:19:13
increases and uh most analysts that I
00:19:16
talk to expect it to continue in
00:19:18
2014 so you're basically optimistic
00:19:21
about the economy and basically
00:19:23
optimistic about the stock market not
00:19:25
too keen on bonds that summarizes it
00:19:28
yeah and that was pretty much 2013 but
00:19:31
again always reminding and no bull
00:19:33
market goes up in a straight line you
00:19:35
have to get through these uh Corrections
00:19:39
that uh will always be part of uh the
00:19:42
stock market all right well we'll come
00:19:44
back in a few weeks or a month or so and
00:19:46
see uh what's happening then thank you
00:19:48
very much thank you jff
00:19:53
[Music]
