Tuesday, February 14, 2012

Jeremy Siegel is at it again

It has been said that the only purpose of economic forecasters is to give weathermen a good name.  Nevertheless, making a case for a specific future is a business that seems to pay quite well, and there are apparently enough shameless forecasters (or deluded egotists looking to be annointed with Oracular powers) to keep at it relentlessly.

The famous author of "Stocks for the Long Term" and other books about the benefits of owning equities, and sometime Wharton School professor Jeremy Siegel is out again making market forecasts.  Unsurprisingly, his argument is that the best thing you can do is own stocks.

I don't have a big issue with thesis, but I do take issue with the argument that NOW the market is poised for strong returns.  Siegel seems to believe that the bumpy flatline of 2011 will be replaced with much stronger price performance in 2012.  The argument goes that in studying similar 5 year periods in which stock performance was a bad as that through 2011, the next 18-24 months showed strong gains in stock prices.

This is to substitute reason and logic with statistical correlation, a favorite attitude of several quants, and business school professors in general.  I think it is because their colleages all want to read about their correlation and regression analysis that they think that showing some correlations makes them a brilliant forecaster.

It may be true that the five years through 2011 had low stock market gains.  This is probably also true through 2010, and through 2009, even though 2010 did  not result in strong market performance in 2011.  The fact is, the markets bad performance is mostly attributable to 2007-2009, since March of 2009, the market has done brilliantly, so it is hard to see the whole market as beaten down and vulnerable.

Siegel also seems to disregard economic growth in his analysis, assuming, apparently, that growth is largely constant over time.  What happens if an aging society leads to low growth, a la Europe - or Japan?  Will the surprisingly strong results that were available to investors from 1871, when modern corporations were only just being created, still obtain?  Is it not possible that the growth that underpinned the 8.7% Siegel takes as a given, is in fact a one-time fluke related to the uspurge of productivity a corporation?

For that matter, what would Siegel's numbers look only at US equities, and disregard problemmatic foreign markets.

Finally, Siegel fails to mention the significant and long-term (20 year) periods in which bonds have outperformed stocks.

I do not mean to suggest that the markets might no go up.  I cannot really say how markets will perform.  Moreover, several stocks are still reasonably priced.  But to assume that because some correlations you have done suggset it, is pure crap.

Siegel may be right, the market may have a terrific year, certainly it is off to a strong start.

No comments:

Post a Comment