On May 19th, RVP hosted an event in partnership with WisdomTree Asset Management that featured insights from Dr. Jeremy Siegel. Dr. Siegel is the Russell E. Palmer Professor of Finance at Penn’s Wharton School and also a frequent economic commentator in the Wall Street Journal, CNBC, and Fox Business; in addition, he writes a regular column for Kiplinger.
In his remarks, Dr. Siegel made a compelling case for stocks as a central part of any long-term investment strategy—and specifically as a tool to protect wealth against inflation. Dr. Siegel based his case on two hundred years of U.S. market data, which show equities as the best-performing asset class. Accordingly, Dr. Siegel stressed that the best way to grow and preserve wealth over the long run is to own a diversified portfolio of equities.
Dr. Siegel emphasized that stocks are a more volatile asset class over the short term (one, three, or five years), and investors should account for that near-term volatility in their investment plans. This holds especially true for those who are nearing retirement or recently retired: the sequence of annual investment returns can be just as important for lifetime performance as the annual returns themselves, and a large drawdown early within an investment timeline can significantly impact performance over the long-term.
Dr. Siegel also addressed the current market volatility, noting that the ability to manage fear and greed and stick to a clearly-defined investment strategy remain critical factors for success.
What About Inflation?
In his presentation, Dr. Siegel shared his perspective on why stocks are the best long-term hedge against inflation—even compared to gold, which many investors believe offers the best possible protection against inflation. He also noted that dividend-paying stocks are an important component of managing inflation during corrections, due to their ability to provide a return that is not driven by appreciation in underlying asset prices.
Understanding The Current Economic Environment
Regarding the current economic environment, Dr. Siegel believes money supply (M2) growth is the key driver of inflation, and that the current inflationary environment should not be a surprise given the explosive growth in money supply in response to the COVID-19 pandemic. In Dr. Siegel’s view, the first stimulus package to address the COVID-19 crisis was necessary, but the additional aggressive fiscal measures that were taken to address the economic impact of the pandemic added to inflationary pressures.
M2 is a calculation that includes cash, certain bank deposits, certain retail money market funds, and other assets that are easily convertible to cash near-term. It is considered a broad measure of money supply. M2 growth has slowed substantially in recent months, which could moderate inflation; however, Dr. Siegel’s concern is that a combination of higher rates and inflation could result in a U.S. recession, a concern that we share and will continue to monitor closely.
Should it occur, a U.S. recession would likely have negative implications for risk assets, including equities. Nevertheless, after the recent drawdown, stock valuations look more attractive than they have in years.
Earnings yield (simply the inverse of P/E) has been a good long-term predictor of inflation-adjusted forward returns, and today, the S&P 500 has an earnings yield of 5.2%. This is attractive value compared to Treasury Inflation-Protected Securities (or TIPS) which sit around 0.62%.
As it relates to sector allocation, Dr. Siegel believes the non-U.S. market currently offers better value than the U.S., but he remains bullish long-term on U.S. equities. He also noted that value outperforms growth in the long run. And although growth has vastly outperformed value in recent memory, value has gained ground during the current bear market. Dr. Siegel and RVP expect value stocks to continue gaining ground on their growth counterparts over the near term.
Most importantly, he argued that the long-term risks of not owning stocks far outweigh the near-term risks associated with remaining invested. That is not to say that stocks cannot go lower; we will never be able to predict a market bottom. Still, today’s valuations are historically attractive and support good forward returns, and generally speaking, the current environment is an opportunity to add risk consistent with your long-term objectives.
Dr. Siegel’s presentation was filled with great insights, and he made a compelling case for stocks as a central part of any long-term investment strategy. If you would like to learn more about Dr. Siegel’s presentation, or if you have any questions about how best to navigate the current market landscape, we encourage you to get in touch with the team at RVP.
Information contained in this article is obtained from a variety of sources which are believed though not guaranteed to be accurate. Past performance does not indicate future performance. This article does not represent a specific investment recommendation.
No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from Relative Value Partners, LLC which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their Relative Value Partners counselor. All other inquiries, including a potential advisory relationship with Relative Value Partners, can be directed here.
Deutsche Bank, The Age of Disorder: Long-Term Asset Return Study (page 57 and 58) (Link)
 Forbes, How To Understand Sequence Of Returns Risk. (Link)
 Bloomberg Terminal, SPX Index, Current Earnings Yield as of 06/28/22
 St. Louis Fed, Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Weekly as of 06/28/22 (Link)