Even though U.S. stocks have nearly doubled since the crash, they remain very attractive, Wharton's Jeremy Siegel says.
Jeremy Siegel, the Wharton finance professor and advisor to New York-based ETF sponsor WisdomTree, says inflation is low enough for him to consider stocks as attractive as they’ve been in a long time. He also told IndexUniverse.com’s Managing Editor Olivier Ludwig that whatever anyone says about the Federal Reserve’s recently completed quantitative easing program, it did pull the U.S. economy away from a deflationary precipice. Siegel, going out on a limb, says if Brent oil can stay around $100 a barrel, growth in the U.S. might just reach 4 to 5 percent in the third and fourth quarters.
Ludwig: When Bernanke said “monetary policy is no panacea,” was that code that stimulus is over?
Siegel: You have to be careful. He actually said other things could be done, but he said this is just not the time to do them yet. But you are right: He did say the situation is very different this time with core inflation rising instead of falling as it was nine months ago. He definitely did stress that difference, but he also mentioned things that could be done. I’ve actually been saying that rates on reserves should be reduced to zero if we want to get banks to lend them out more. And he even mentioned that right in his press conference as something that could be done.
Ludwig: But that rate is already approaching zero, isn’t it?
Siegel: Yes, it’s only a quarter percent. But there’s even talk that you could make the rate negative and really get the banks interested in lending. They have over $1 trillion in excess reserves.
Ludwig: Do you think banks will actually lend with the proper coaxing? Some say banks are most interested in building up their balance sheets to conceal whatever bad assets are still there. Do you buy that, or is that exaggerated?
Siegel: There’s not $1.5 trillion of bad assets, let’s be realistic. The major write-downs have been taken. But you’re right. They’re very risk-averse now; they want to keep a lot of reserves.
Ludwig: So, how do you assess this juncture we find ourselves at? A year ago, there was Greece as well—and of course the “flash crash.”
Siegel: Yes, that added a little extra level of anxiety for equity traders. And we did have a soft patch in the middle of last year. Jobless claims went up over 500,000 in July, and the market reacted down.
And this year, yes, the second quarter was disappointing. I personally think the whole first half was much more influenced by the rise in oil prices and gasoline prices than many forecasters had realized.
The effects of high energy prices are lingering. We’ve had falling gasoline prices for a month, but it’s slow to turn around. People think: Now I don’t have as much to spend. In addition, the Greece situation has gotten worse and the tail worry about contagion has grown.