A Conversation with Professor Jeremy Siegel: Market Commentary from Cabana’s CEO – July 30, 2019

3 months ago

  • Share this:

This week’s commentary is a special one. I hope that you enjoy it as much as I did working on it.

Last week much of our Cabana team traveled to New York to meet with WisdomTree and their principals. I have always been an admirer of the company and a big believer in the economic foundations upon which they build and distribute their investment products. They are advocates of the receipt of dividends and keeping it simple by investing based upon the time-tested macro trends of asset classes. In a very real sense, they were pioneers in recognizing the efficiencies of using ETFs in building portfolios. WisdomTree’s founders came from the University of Pennsylvania Wharton School of Business, which happens to be one of the top business schools in the nation. Jeremy Siegel is the Russel E. Palmer Professor of Economics at Wharton and one of the preeminent living economists in the world today. His book, “Stocks for the Long Run,” is a staple of investment theory and practice. Professor Siegel was a founder of Wisdom Tree and remains an owner and adviser at the firm today.

I had the great opportunity on Thursday to spend time with Professor Siegel and ask him his thoughts on the current state of the economy and how it might impact investing for the rest of the year. Below are my notes from our conversation.

  • He noted the wide disparity in predictions in second quarter GDP (the report came out the next day). Economists were forecasting between 0% and 2%. Professor Siegel stated that while the economy was undoubtedly slowing, there was not a recession on the horizon. He felt that the continued strength in employment was what mattered most and as long as the employment numbers were strong, fears of a recession were overdone. He predicted the second quarter GDP number to come in at 2%. It came in at 2.1%.
  • He discussed the upcoming Federal Reserve meeting (it starts today) and the decision on lowering interest rates. Professor Siegel felt like a 25 basis point cut is likely. He noted a 50 basis point cut over the remainder of the year is appropriate to deal with problems associated with a yield curve inversion. The current flat yield curve is not good for banks and makes borrowing more difficult.
  • He mentioned the strong negative correlation between stocks and treasury bonds. Because of this, treasuries are a great hedge for stocks, which results in people buying treasuries whenever there is fear in the market. This buying of treasuries (particularly long treasuries) causes a flattening of the yield curve and compounds the problem faced by the Fed in promoting a steeper yield curve. The downward pressure at the back end of the curve results in the Fed having to continually lower the short end to prevent an inversion. Professor Siegel predicted the 10-Year Treasury to remain rangebound between 1.5% and 2.25% over the next year.
  • Professor Siegel stated that S&P 500 earnings are presently $161.00 per share. Thus, the S&P 500 is currently trading at a price to earnings ratio (P/E) of 18.60. He feels like the market is fairly valued given the persistently low interest rates both here and abroad. He thought fair value was between a P/E of 18 and 20. He stated that low interest rates cause stocks to remain attractive. He particularly liked dividend payers and other safe equities. This comes as no surprise given his background and writings.
  • In conclusion, we discussed the inter-relationship between the U.S. and other world economies. He pointed out that as the largest economy in the world, our strength or weakness will inevitably impact the rest of the world. Likewise, economies like China and Europe have ramifications on our economy. It is important to factor in these relationships when making investment decisions.

The sum of his thoughts were that markets are fairly priced and that we are not facing an imminent recession. He would like to see some steepness return to the yield curve if for no other reason than precautionary. It is important that world economies work together for all to succeed. He did not feel that a full-blown trade war with China would occur as it would significantly harm growth worldwide and present major headwinds in President Trump’s attempt to get re-elected.

It was a great honor to simply spend some time with one of the great thinkers in economics and finance. I believe everyone in the room felt the same way. I am hopeful that we will continue to work with WisdomTree going forward. As such, we may get to spend more time with Professor Siegel. If and when I do, I will pass along his thoughts.

A PDF of this week’s commentary is available at the following link:

Disclaimers

This material is prepared by Cabana, LLC(d/b/a “Cabana Asset Management” & “Cabana Retirement Solutions”) and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Arkansas, Texas and Colorado. Cabana only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at https://www.adviserinfo.sec.gov/.

Financial Advisor magazine is a monthly financial services publication that delivers market information, strategies and trends to help advisors better serve their clients. Registered Investment Advisers founded in 2015 or before with minimum AUM of $300 million were ranked based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. Visit www.fa-mag.com or https://thecabanagroup.com/disclaimers/ for more information regarding the ranking.