The Investment Scientist

Jeremy Siegel’s Commentary on Economic Events

Posted on: July 31, 2011

Today, I received an economic commentary from WisdomTree that includes a piece written by Professor Jeremy Siegel. He is a University of Pennsylvania professor and author of several books totting stocks as long-term investments. His piece covers four subjects: economic slowdown, US default, European debt crisis, and corporate earnings. Below, I have excerpted key passages for readers.

On economic slowdown

“Estimate of GDP growth in the second and third quarters have been marked down significantly over the past three months, mainly the result of lackluster consumer demand …US consumer sentiment has plummeted. Much of that is due to the continued stalemate on the budget deficit and politicians talking about curtailing Social Security and Medicare benefits.”

On US default

“It is my opinion that the US will not default on any debt payments or entitlements and that an agreement on a temporary increase in the national debt ceiling will be reached.”

On European banking crisis

“A more immediate concern to stock investors is the potential of a general banking crisis in Europe spilling over to theUS. There is no doubt that the European situation is worsening … Yet I believe that the European Central Bank will stem any general crisis by providing whatever liquidity is needed.”

On corporate earnings

“Despite the slowdown in the US economy, estimates of S&P 500 earnings for 2011 are now higher than they were when I wrote my last commentary in April, and the early returns from second-quarter earnings reports are extremely favorable … Currently the S&P 500 index is valued at about 13 times this year’s operating earnings and 11.7 times next year’s earnings. European stocks are even cheaper.”

The upshot of his message is that despite all the uncertainties, stocks may still be where you want to invest your money.

I personally do not hold Professor Siegel in as high regard as Professor Eugene Fama. However, his message is still much more credible than the noise produced by the financial talking heads.

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2 Responses to "Jeremy Siegel’s Commentary on Economic Events"

Good comments. In listening to the CEOs discuss their earnings on CNBC ( even index guys watch the market) for this most recent quarter I was impressed by the role that overseas earnings and especially emerging economies sales played for those companies that did very well. My concern looking ahead therefore is the possible impact if these areas slow down because of Europe’s problems and China’s et. al. battles with inflation.

Much is unknown about how the future will unfold, that’s why we diversify across asset classes, diversify across economies and diversify across continents.

I follow what’s going on in the world, but I keep reminding myself what we see is but a tip of the iceberg and we should not base our investment decisions on what we see or hear at the moment.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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