Wharton Professor Jeremy Siegel addressing Top Advisors at Forbes Shook Top Advisor Summit at the … [+]
Credit: Tim Pannell
On a day when the Dow Jones Industrial Average and other U.S. major stock indexes dropped more than 3% largely on fears over the spread of the coronavirus beyond China, Wharton professor Jeremy Siegel told a standing-room-only gathering of wealth managers at the Forbes/SHOOK Top Advisor Summit in Las Vegas that he could see the expansion continuing for three to four more years. He also told the group that they should rethink the 60/40 stock to bonds allocation model for retirement drawdowns, and instead move to no less than 75/25, relying more on income from dividends rather than fixed income securities.
Speaking just hours after markets closed on Monday, with the Dow down 1000 points, the author of the 1994 buy-and-hold bible, Stocks For The Long Run, told the crowd of elite advisors that the plunge illustrated an important new market paradigm.
“When the Dow is down 1000 points like today, Treasury bonds have become the world’s best risk asset, they were not always, but because they have become that, their yield has plummeted,” Siegel said. “The major reason why long term interest rates are hitting new lows today, and may even go lower, is because of the hedge asset of choice, what we all now know as the negative beta asset, which have an insatiable demand in the world economy.”
That insatiable demand, globally, means rates will remain extremely low, that the yield curve may become inverted, and that investors should no longer rely on bonds for income for the foreseeable future. Thus owning a heavier weighting of stocks will produce better long term returns. Siegel’s Monte Carlo simulations found that investors ran out of money less frequently with the 75/25 allocation.
“Normally, you think that if you increase your equity proportion, you’re going to have more wealth at the end if you succeed, but you’re going to increase the drawdown risk, that you’re going to run out of money,” Siegel said while presenting his findings. “Well, what we’ve done is simulations of drawdown risk and guess what we find… you actually ran out of money less frequently with a 75/25 split than you did with a 60/40…This never used to be the case.”
Addressing a principal reason that the markets had taken the precipitous dip Monday, Siegel said he doesn’t view the coronavirus as an issue that will continue for a long time. Despite that, he does anticipate a “choppy” year in the markets. He went on to assert that the dip fueled by fears around coronavirus and its impact on the supply chain could have a silver lining, financially speaking, as it reduced his concerns around a momentum driven market with the virus scare breaking the bullish streak.
As for the larger market forces and the question of how much longer the unprecedented economic expansion can continue, Siegel has his eyes fixed on two major indicators, the unemployment rate and labor force participation rate. Siegel was greatly encouraged because his research has found that labor force participation was up broadly, in the U.S. and overseas. He believes this could extend the expansion, and bull market, for another three or four years. .
Speaking on national politics, Siegel addressed the 2020 elections, saying he believed that Bernie Sanders had the Democratic nomination all but locked up. Siegel added that Trump’s reelection will be deeply tied to a strong economy and strong stock prices. Discussing a potential Sanders presidency, he said that which party holds Congress, namely whether Republicans hold the Senate, plays a large role in how that hypothetical administration will affect markets. For a possible Sanders administration, his largest concern was an unwinding of the corporate tax cuts passed in the Tax Cuts and Jobs act of 2017, something not as likely with the Senate controlled by the GOP.