Where Conservative Investors Should Go as the Rally Continues

As seen on RIAbiz.com, February 2011
Article By: Joe Luby, CFP®

Speaking at the TD Ameritrade Institutional National Conference in San Diego last week, Wharton finance professor Jeremy Siegel said that the stock market is not ahead of itself. With stocks at 20% below trend line, the current rally will continue, at least for a while. Siegel looks at a 209-year trend line, going back to 1802, which shows a 6.7% annualized real return over that period.

“This market is not overvalued,” said Siegel, adding that, “it’s not too late to get in.” If advisors have clients who’ve been sitting on the sidelines, he suggests encouraging them to get back in while there’s still time.

Bonds, however, are another story. The bond bubble, which Siegel said he predicted six weeks early, is not done yet. Treasury bonds offering thin yields and short-term bonds, paying almost nothing, could result in capital losses if interest rates start to rise.

Where should conservative investors go? Siegel recommends dividend-paying stocks. While the recent big drop in such stocks was due to the financial sector, all of the other nine sectors were doing fine. Stocks are historically cheap according to Siegel. Corporate earnings growth has been strong and he expects this trend to continue. During periods when interest rates remain at 8% or below, the average P/E of the S&P 500 rises to 19. This multiple, combined with estimated earnings for the index topping the 2007 record, shows there is still much upside in the market.

And what about gold? Not so much. Short of a collapse in the global economy or hyperinflation – neither of which are likely, according to Siegel, people who buy gold today will be disappointed in five years.

I’ve seen Dr. Siegel speak at other industry conferences, and while he’s known for his “stocks for the long-run” mantra, I’ve never seen him quite so animated and adamant. His speech was well received, as attendees dined on steak, asparagus and polenta before heading to their afternoon breakout session choices. The main lunch room was filled to capacity and late comers had to settle for the overflow room, with Dr. Seigel’s presentation piped in. Glad I made it into the main room on time!