Jeremy Siegel tells advisers: Markets still have 'extraordinary' potential

Despite the huge equity market rally since the March 2009 lows, U.S. stocks remain undervalued relative to long-term trends, according to Jeremy Siegel. The well-known perennially bullish market historian and finance professor at The Wharton School of the University of Pennsylvania delivered that upbeat message today to financial advisers at Pershing LLC's national conference in Hollywood, Fla. The S&P 500, now at just under 1,100, would have to rise to 1,500 — a roughly 35% increase — to return to its long-term trend line going back to 1935, Mr. Siegel said. A clear “buy” signal historically occurs when stocks trade at two standard deviations below trend, a point reached in March 2009. With the more than 60% rise in the S&P 500 since that time, some have suggested that the best opportunities to capture value in the equity markets may have passed. But Mr. Siegel hardly blinked when asked if it’s too late for investors to benefit from a continuing period of outperformance. "I say no," Mr. Siegel said. "From any historical-valuation standpoint, you're not too late. You still have an excellent market to give you extraordinary returns going forward." Mr. Siegel thinks the current period is similar to the post-World War II era, when people expected a recession and avoided stocks. Investors then "flocked to government [bonds at low yields] and got slaughtered over the next 30 years," compared with returns from equities, he said. Mr. Siegel said the sovereign-debt crisis gripping Europe is a function of a flawed common-currency policy. The biggest problem with the weaker countries in the eurozone is that their production costs have become too high since using the common currency. "It's not just a problem with the [government] deficits," he said. If the weak countries had their own currencies, they "would devalue and become competitive," Mr. Siegel said. "That major policy tool is not available for them now," he added. As a result, these nations face major wage cuts, which will be politically difficult to do. With Europe, "the problem is first with the [government] debt," Jack Dzierwa, global strategist at U.S. Global Investors Inc., said in an interview at the conference. But he agrees that "the problem with the [common] currency is that [eurozone nations] cannot devalue to make themselves competitive."