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Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, spoke on Tuesday about the equity markets, treasury bonds, and artificial intelligence before the Economic Club of New York in a moderated discussion with President and CEO of the New York Fed John C. Williams.
Here are some of his key remarks:
On Equity Markets
- The most important valuation is the price-to-earnings ratio of the market, he said, and “I don’t think we’re at the top of a peak or at a bottom of that.”
- The right P/E ratio of the market overall should be about 20x, “with a wiggle room around it,” he said. The historical is 16x.
- There is a very good reason why there should be an upward migration of the equilibrium price earnings ratio over time, he said. “Just the simple dramatic reduction in transaction costs of getting a perfectly diversified portfolio.”
- “So, even though [his research] shows that the long run real return on stocks was 6.5% per year, the average investor was getting about 5% (before diversified portfolio simplification), 5% real return on the market is exactly consistent with the 20x price earnings ratio.”
- He also said he does not see the market as a bubble.
On Treasury bonds
- A really important and ignored factor on interest rates is, he said, is to what degree do Treasury bonds hedge the stock market or other risk assets? “Treasuries turn out to be great hedges when investors have certain types of risks, [such as geopolitical, recessions, pandemics, financial crisis],” he said. When the stock market was tanking into a bear market, treasuries rose, and that hedge worked for 40 years.
- But there is one type of risk for which bonds are “absolutely terrible, and that’s inflation,” he said.
On Artificial Intelligence
- “AI will raise real growth, and anything that raises real growth will raise real interest rates.” AI is adding about 1.25-1.5 of a percentage point to growth.
- AI is just another technology [to change or revolutionize productivity] but it could be qualitatively different, he said.