Wharton Prof Duel: Siegel vs. Stambaugh

Several weeks back we highlighted a new study that found stocks are actually more risky in the long run than they are in the short run. Today in an interview posted on the University of Pennsylvania’s Knowledge@Wharton web site, two Wharton School professors — Robert Stambaugh, one of that study’s co-authors, and Jeremy Siegel — talk about many of the issues the study raises for stock investors, as well as the current market conditions.

Among the particularly interesting parts of the interview:

  • Siegel says that bonds and other asset classes might get more risky over the long run, and Stambaugh says that could be true — the study only examined stocks. “It’s quite possible that this same kind of [long-term] uncertainty in nominal bonds could well make them less attractive,” Stambaugh says, adding that he and the study’s other authors hope to due follow up research on that issue.

  • Siegel says he thinks the market remains attractive even after its recent surge. “So [even if] you missed a part of this rally … it is still a very reasonably priced market and you will be very amply rewarded in the long run.”
  • Stambaugh also notes that the uncertainties that make stocks riskier over the long run — political and environmental events are two examples — don’t just involve negative events, like political upheaval or global warming. They also could involve positive surprises that make for higher stock returns.
  • Siegel says he thinks the recession is moving away from the 1930s in terms of its severity and back to the less-severe recessions of the 1970s and 1980s. But he says the low volatility of the economy and stock market over the past 20 years — the so-called “Great Moderation” — “seems to be over and could have been an anomaly”.
  • Stambaugh stresses that his study’s findings about volatility increasing over longer periods don’t mean that volatility in the future will be greater than the high volatility levels we’ve been experiencing in the past several months. “We expect that sort of short-run volatility to moderate,” he says. “Our paper is more about what a more typical environment — or more average environment — for volatility would offer an investor in terms of short-run versus long-run. … We’d all be very surprised if [this historically high short-term volatility] were to continue” for long periods.

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