Jeremy Siegel: Dow Headed to 16,000 and Beyond

Wednesday, 03 Apr 2013 08:27 AM

By John Morgan

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Jeremy Siegel, a finance professor at Wharton, sees more blue skies ahead for the stock market, and predicts the Dow Jones Industrial Average will surpass the 16,000 mark this year.

Siegel, author of the best-seller “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies,” bases his optimism on continued low interest rates and a widely held perception that bonds are currently overvalued as an alternative to stocks.

“The low interest rates are going to fuel continual multiple expansion. I think [stock] earnings are going to be better,” he told Yahoo.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

“We’re not done yet. I think this market has a lot of room to run,” he added.

Siegel predicted a year ago that the Dow, then near 12,000, was headed to 15,000, despite European financial turmoil and U.S. fiscal deadlock. The average is certainly headed in that direction, and closed at 14,662 Tuesday.

This time around, he told Yahoo the Dow could reach 16,000 to 17,000 by the end of 2013, and even higher — possibly 18,000 — in 2014.

“Stocks should have a higher price-earnings ratio when the major alternative, fixed income, is yielding very low,” Siegel said. “We could easily get a [forward] multiple of 16 or 17 on the stock market, which will drive it to the levels I mentioned.”

Even if the Federal Reserve begins to raise rates, it would not necessarily be an immediate signal to bail out of stocks, according to Siegel.

“Bull markets don’t end when the Fed begins to tighten. They end when the Fed is near the end of its tightening range.”

The end of the Fed’s interest rate tightening program is generally anywhere from 18 months to as much as two to three years from when it first begins to raise rates, Siegel noted, adding that long-term Treasury rates could exceed 3 percent or even reach 4 percent without compromising bullish prospects for equities.

Siegel has consistently favored stocks since 1994, even through major market pullbacks, which has left him open to being branded a “perma-bull,” according to Yahoo.

In its 2013 first quarter update last week, Morningstar said major equities are already very close to fair value. Morningstar concluded 99 percent of U.S. stocks in particular have already reached fair value.

Vanguard Group founder Jack Bogle told CNBC investors should invest in stocks for the long term and be prepared for at least two declines of 25 to 30 percent, maybe even 50 percent in the next 10 years.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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