Stocks Still Win, Siegel Says

Jeremy Siegel, the Wharton professor and author of Stocks for the Long Run, says that the painful losses investors endured in the recent bear market have not done anything to change the merits of long-term stock investing.

“A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches,” Siegel writes in the Financial Times. He says that since 1871, the three worst 10-year periods for stocks (ending in 1920, 1974, and 1978) were followed by real, after-inflation returns of more than 8%, 13%, and 9% in the succeeding 10 years.

And, Siegel says, following the 13 ten-year periods since 1871 in which stocks had negative 10-year returns, the market provided real, after-inflation returns of more than 10% over the next 10 years, on average.

Siegel also offers some interesting data on the stocks vs. bonds debate. “Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871,” he says. “And over 20-year periods, stocks bested Treasuries in all but about 5% of the cases.”

Back in March, the annual returns on long-term Treasuries did outpace stocks over the prior 40 years, returning 8.90% vs. stocks’ 8.71%. But while the stock return was below its long-term average, the return on Treasury bonds was well above average, Siegel says. “Indeed, to obtain those bond returns over the next 40 years, yields on long-term US Treasury bonds would have to fall to about 2%, an exceedingly unlikely scenario,” he writes. “In fact, with the recent stock market recovery and bond market decline, stock returns now handily outpace bond returns over the past 30 and 40 years.”

Siegel also says that proof of stocks’ long-term dominance over other asset classes isn’t reliant on U.S. data. Three UK economists have examined the historical stock and bond returns from 16 countries since 1901. “In spite of the disasters visited on many of these countries, such as war, hyperinflation, and depression, all 16 countries offered substantially positive after-inflation stock returns and the superiority of equities over fixed-income assets was decisive in all countries examined,” he says.

“The recent behavior of stock market prices sheds some light on a phenomenon which has long puzzled economists: Why do stocks over the long run yield so much more than bonds?” Siegel writes. “The pain that investors often suffer, such as in the recent bear market, forces many to forsake equities altogether. This drives stock prices down and enhances their future returns. Equities offer investors excellent returns to those willing to accept the market’s volatility.”

Those who contend that the U.S. consumer slowdown will hamper stock returns are overlooking the global nature of U.S. firms, Siegel says. S&P 500 companies now get almost 50% of their profits from overseas, and growth from emerging nations will pick up the slack, he contends. And, he adds, stocks are still selling at low valuations, even after the recent run-up.

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