Tags: Siegel | Dow | invest | market

Jeremy Siegel: Dow's Fair Value Is 18,000 to 18,500

Friday, 17 Jan 2014 08:32 AM

By Dan Weil

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While stocks already have scored strong gains over the past five years, the party still isn't over, says stock guru Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School.

The Dow Jones industrial average has soared 154 percent from its March 2009 low, closing at 16,417 Thursday.

"We're much closer to fair market value now than we were a year or two ago," Siegel tells CNBC. "I still think we are below fair market value, so I still think we've got 10 to 15 percent to get there in the markets."

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He sees fair value for the Dow at 18,000 to 18,500. To be sure, there could easily be a correction before then or an overshoot afterward, Siegel notes. "We know nothing goes in a straight line up to fair market value."

Other experts too say that the market may trade in a zig-zag pattern for substantial periods.

"It’s not going to be a straight road up like what we saw in 2013," Robert Pavlik, chief market strategist at Banyan Partners, tells Bloomberg.

"A lot of what we saw in 2013 was predicated on money flowing into the market from the Fed. It’s going to be an upwards revision to earnings consensus this year that will push the market higher."

Meanwhile, Siegel says, many of the market's risks are disappearing, which in itself is worrisome, as bull markets historically climb a wall of worry.

But the one obstacle the market continues to face is that individual investors aren't flocking to stocks. "They're tiptoeing in. But when you look at the flows into the equity funds, it's not there."

So even though bullish sentiment indicators are high, "when you go to the general investing public, they're still very skeptical," he explains. "We've got to bring them in much more before we get to the top of the bull market."

Corporate stock buybacks are going to increase, Siegel predicts, adding that even though companies are increasing their dividends, the market's dividend yield still only stands around 2 percent.

"So they're making 6 to 7 percent [in profit increases]," he states. "If they don't invest in cap-ex [capital expenditures,] which has slowed down, they buy back their shares."

Unlike some experts, he doesn't view share buybacks negatively for stocks. That's because buybacks "really increase per-share earnings," Siegel argues. "[They] lower the supply of equity. That is almost as good as dividends in my way of [thinking to] get money back to the shareholders."

Siegel isn't greatly worried about rising bond yields. He thinks strengthening economic growth can push the 10-year Treasury yield up to 3.5 to 4 percent. It stood at 2.84 percent Thursday. But even at 4 percent, "that's very low compared to the historical average," he stresses.

Editor’s Note: Free Video — ‘Rogue Calendar’ Could Turn 490% Profits

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