Financial Advisor reports on Wharton School of Finance Professor Jeremey Siegel’s comments at the annual Inside ETFs conference, where he critiqued the widely used Shiller P/E Ratio. Siegel did not necessarily attack the original logic of the Shiller P/E (which won its creator, Robert Shiller, a Nobel Prize). Instead, he noted that changes to the definition of generally accepted accounting principles (GAAP) earnings by Standard & Poor’s in 1990 have had an effect. Following the Financial Accounting Standards Board requirements, the GAAP change required mark-to-market accounting, which means companies mark down their assets when they have a loss but can only markup assets when they are sold.

Turning to the market, Siegel described himself as “the token bull.” He maintained that Fed policy is not “artificially inflating stocks” and we are not experiencing a new bubble. Nonetheless, he concurred with many observers that investors should expect lower returns going forward, but predicted about 5-5.7% real returns over the next decade. He cited slightly high valuations, slow economic growth, the risk aversion of an aging population, and a perplexing decline in productivity. On bonds, he predicted a bigger decline, with real returns around 1.0% to 1.5%.