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hello I'm Jeff Brown for knowledge at
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Wharton today we're with Wharton Finance
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Professor Jeremy seagull one of our
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frequent guests and thank you for
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visiting us again happy to be here
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there's been a lot of volatility in the
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in the stock market uh in the last few
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days and I just wonder if you could give
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us a quick assessment of what's going
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on well you know there that seems to be
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uh the description of the market over
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the last five
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years periods of volatility I mean we
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have the uncertainty with the sequester
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we have the developments in Italy uh
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which are more really more uh surprising
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and uh shocking to the market uh and
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that's that's thrown a little scare in
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it um I I still think uh as we'll talk
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about that the fundamentals are very
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strong and they're going to overcome
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these negative risks uh that we we see
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onto the market uh let's talk about the
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sequester it's coming up very soon a
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couple of days uh does that really
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matter uh is it as important to the real
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economy as people say it is and how
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would that be reflected in the stock
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market right there there's a lot of you
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know scare stories about you know what's
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going to happen and it it's hard for me
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to get the amount of actual dollars
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which the experts say is probably going
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to be 50 billion this year to get all
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that
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disruption um
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uh and and it's a tiny tiny fraction
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really of of uh of of GDP most of the
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forecasters that I've seen uh say if the
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full sequester this year takes effect
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that we'll see probably a quarter or a
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half a point off of GDP now although
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that's not
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insignificant
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um we have momentum going in our economy
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and particularly with the housing market
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which I think is the key to the recovery
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that I think could uh more than overcome
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that deficit from the sequester and then
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uh Europe and the problems in Italy uh
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and and the broader problems we've been
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seeing for some time in Europe how much
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are those affecting us well I've I've
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been on record to say that the euro is
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is way too high when we got up to 137 it
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was sort of crazy it's it's down now to
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130 but I think that dragi is going to
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have to both talk down the Euro and
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lower those interest rates because I
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think I mean Europe is is in is in
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trouble uh it's going to be slow growth
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for a long time so we're going to see
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more stimulus uh from the European
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Central Bank here um dragi has pledged
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and I believe him and he can to prevent
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any general banking crisis he's going to
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step in and Prov provide that liquidity
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so that big fear that uh really
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dominated the market last year and even
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the year before first with Greece and
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then with Spain uh is mostly gone so we
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deal with very very slow growth that's
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mostly been factored into the market um
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I think stimulus by the ECB in terms of
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a lower Euro and lower rates will will
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help that situation somewhat uh so it
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won't be a drag on us markets now with
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us markets uh I read the other day that
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although the big indexes the S&P and the
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Dow are getting back close to their
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highs of about a decade ago the some of
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the fundamentals are looking pretty good
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better than they did back then like the
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price earnings ratio what are you seeing
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there yeah exactly and by the way uh the
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some of the other indices the small
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stock indices the Russell 2000 the
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midcap indices are at all-time high so
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um uh it's not just a few stocks that is
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really driving this Market I think
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what's really important
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uh in a couple of things um uh you know
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we hit the all-time high in October 2007
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and and and it was almost the same as
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where we were in January of 2012 years
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ago the huge difference is 12 years ago
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we were selling at 30 times earnings uh
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now we're selling at 15 time earnings
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and actually looking forward 14 times
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earnings and that's all the world of
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difference earnings are at all-time
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highs dividends which were cut
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dramatically um during the financial
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crisis by the financial firms and others
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um now Financial firms haven't come back
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to their levels they were before but
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other firms have raised their dividend
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so much that uh in last quarter and this
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quarter we at the all-time high in
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dividend so the the fundamentals
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supporting this Market this high are so
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much stronger than what we had in 2007
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or in 2000
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and let's look at the bond market and of
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course it's it's been very generous to
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people in the in recent decades uh but
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now uh interest rates are so low it's
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inconceivable to go much lower and the
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the risk of rate increases and price
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decline seems high or is that too
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pessimistic well you you know I will
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admit I've been calling I I thought the
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bond market would turn around last year
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and the year before uh but you know when
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we look back at July um when we got down
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to I don't it was 1 1.39 I think on the
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10year Note uh I was telling I was I was
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giving a lecture yesterday and I said
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that uh we years from now we will look
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back and say July of 2012 was the low on
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those interest rates and we we will also
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say how did it ever get so low and what
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that means is there's definitely risk in
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the market for long-term Bond holders
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it's going to affect the treasuries the
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most but high-grade corporate bonds any
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long-term instrument mortgage bonds uh
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will be affected so I you know the uh
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the future there to me uh looks not good
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it is a what should we call it a uh a
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risk asset that people like to hold when
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everything else is in tumult uh it's an
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insurance policy but I describe it as
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one of the most expensive insurance
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policies you can now buy and I don't
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think it's worth the price it'll be a
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huge drag on your portfolio if you hold
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long-term bonds you you wonder whether
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uh just as just as well off putting your
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money in a bank account with FDIC
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Insurance better in a bank account um
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because you won't get the capital loss
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but we know banks are yielding a half a
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percent um or less uh so cash is not
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attractive what what I think is going to
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be happening is that people seeing that
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the world is not ending which of course
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there were so much fears of that the
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last three years are going to uh get
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their feet wet in the stock market again
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into dividend paying stocks um that are
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offering 2 3 4% and More in some cases
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uh because they need income we need
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income uh portfolios need income and
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it's you can't get it from the bond
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market with the risk there and certainly
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uh cash is uh almost zero now and you
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think that at these valuations in the
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stock market uh the risk of buying
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dividend paying stocks for income uh are
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acceptable a absolutely uh acceptable uh
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uh the good thing about the dividend
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paying stocks is first of all you have
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stocks which are real assets if we have
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some inflation I don't I think we're
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going to have two three maybe 4% that's
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a sweet spot for stock stocks
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corporations do well with that it gives
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them pricing power their assets move up
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with prices I'm not fearful of that
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inflation what I don't like is inflation
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567 and I don't don't think we're going
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to get that so this sort of mild
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inflation is real the ideal environment
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for people to go into those dividend
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paying stocks because those dividend
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payments over time and we have a lot of
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evidence have risen 1 to 2% above the
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inflation rate on average over the last
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60 years and it's not too hard to find
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dividend payers 3 4% some of them some
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of the utilities and absolutely phone
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companies no I will admit you know if if
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you find one that's
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10% be cautious it's it's probably will
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not be able to maintain its dividend but
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one thing is very interesting the
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percentage of S&P firms paying dividends
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is rising now for years it was falling
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uh it was a sign you didn't have
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anything better to do with your money
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the growth companies would all now when
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the demand for those are there we see a
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rising Trend so we have about
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35400 dividend paying stocks in the S&P
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500 we have about 200 that are paying
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two and a half 3% and more you can get a
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very good Diversified portfolio and if
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you want to go abroad they're even much
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more dividend paying than they are in
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the United States they pay out a much
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higher fraction of their earnings as
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dividends so go International now you've
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been an advocate of going International
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for a long time and uh in stocks holding
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fairly large percentage of your
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portfolio in uh in stocks from around
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the world is that still the case or is
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it on the risky end of the of the
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spectrum or the safer end of the
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spectrum right now I think I think
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really worldwide stocks are are a buy um
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and I me I was cautious about Europe
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Europe is selling a 10 and 11 price
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earnings ratio so a lot of risk is there
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if you stick with the exporters you know
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those companies that have a global reach
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and the Euro goes down they're going to
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be helped because they're going to
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become much more competitive so there
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are definitely values in Europe and I
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think there are still I as you know I've
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been a big fan of the Emerging Markets
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uh right now the PE ratios of most
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Emerging Markets are 10 to 15
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um and you have a few in the High Teens
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but that's a very reasonable price
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historically to pay for the type of
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growth that they have act they have
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engineered over the last five and 10
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years and and honestly I I still think
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they're going to be the engine of growth
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over the next decade now uh investors
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for a long time have been told that one
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of the keys to success is asset
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allocation the mix of stocks bonds and
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cash and the subcategories but with with
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stocks at fairly good valuations as you
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said say and bonds looking very risky
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and yielding almost nothing and cash
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yielding almost nothing should people be
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adjusting from those sort of standard
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guidelines of asset allocation yeah most
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definitely you know people say Jeremy do
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you hold any bonds and I said the only
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bonds I've held over the years and years
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and years is junk bonds and even they've
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become a little expensive but you know I
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just roll over and reinvest my interest
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there that's a part of my bond that's
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the only Bond part of my portfolio I
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always have some cash you know just for
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liquidity purposes is there but really
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as for an investment purpose outside of
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a you know a little chunk that rolls
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over in junk bonds I I know extra bonds
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uh I'm very enthusiastic about stocks
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I'm not enthusiastic about gold because
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I think gold is price for you know
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either a hyperinflation or the end of
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the world of which neither of of those
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two eventualities in my opinion is going
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to happen I think Commodities are
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expensive um oil is expensive so I
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really stocks properties um now you know
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there is some good values in real
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estates rats are very high but they
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still should be part of your portfolio
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uh uh in some investment properties if
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people want to go into the liquid size
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it's fine and of course if anyone now is
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waiting to buy that home and lock in
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that mortgage rate now is the time and
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definitely that would be an advisable uh
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purchase to M but as far as the liquid
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part of your portfolio the the vast
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majority should be in stocks now the the
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housing market has been a b big drag on
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the economy for years now but we're just
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seeing a a just a endless Cadence now of
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good news and the the latest case
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Schiller news yesterday was quite
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positive I think it was a 7% gain of
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some almost 7% year over year which is
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the most since the crisis uh began uh we
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had uh some Metropol areas like Phoenix
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you know rise year-over-year 20 25% now
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that's a lot of bottom feers uh
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investors that went in picking up
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foreclosed and auctioned uh properties
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at very low price but there is no
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question at the bottom you know has been
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reached the trend is up and I think the
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trend on ho prices will continue uh
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quite strong over the next year and and
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I think that's going to be one of the
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biggest pluses in the economy we get
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through the sequester there might be
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some negotiations there to actually you
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know lessen the impact we get through
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the European crisis again the second
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half of this year could be much stronger
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than most people expect the money that
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people are reluctant to put into Bond
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Investments would it make sense to put
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that into your home or a new home a
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bigger home or paying down your mortgage
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or any of those strategies you know
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right now you should probably um uh you
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know think of refinancing if you haven't
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yet from a higher rate if you uh you
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know always wanted a second home and
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have the wherewithal I mean here is the
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time to get it and finance it I I I you
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know in terms of buying properties the
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bottom you're you're off the bottom if
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you know a lot about properties um and
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you want to you know put some dollars
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there I certainly wouldn't object but I
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still think those opportunities are
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going to be in the stock market uh you
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know stocks are earning uh six seven
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eight% off their off their Capital base
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and and that's a great earnings rate in
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a in a zero interest rate World in fact
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I find that the average price earnings
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ratio of stocks uh when you're in a low
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to moderate interest rate environment
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and we're still in an extremely low
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interest R environment is 19 so you know
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being a PE ratio of 14 or 15 depending
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on how you measure is still well below
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the average valuation in a low to
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moderate interest rate environment so I
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still think the opportunities are there
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in the stock market so let's just wrap
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up with a with a question what do you
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think the stock market's likely to do
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for the rest of this year and over five
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and 10 years yes well I I stuck my neck
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out early last year um uh and and was on
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record saying that I thought by the end
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of
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2013 the da would reach and and exceed
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15,000 uh and a chance of
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177,000 and it's a little below 14 right
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now yeah just skirting around 14 right
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now I still feel very confident about
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the 15,000 17 might be a stretch but not
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out of the question I mean if some of
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these clouds begin to part and people
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finally say hey now there's still value
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in the market um you know I can see it
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between 16 and 17,000 by the end of the
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year and I me that that would be a great
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year but I I think I think we will have
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a good year this year and you see Good
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Times Rolling on after that next five
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years and yeah I mean I they're they're
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not overpriced and I I think we're going
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to get an economy that's going to go
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from subnormal growth of one to 2% to
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good growth of three to four by the end
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of this year and into 2014 well let's
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hope it's all uh transpires that way so
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thank you very much thank you Jeff
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