Professor Siegel On The Markets
Professor Jeremy Siegel, WisdomTree’s Senior Investment Strategy Advisor and Professor of Finance at Wharton, provides his perspective on the current market and how to prepare for the Coronavirus aftermath.
Operator: Thank you for joining the WisdomTree weekly call with Professor Siegel. In this extremely volatile market, we want to make sure we provide advisors with the help and guidance they need. Please visit our website for additional insights, including the recordings of these calls. Today, Professor Siegel will provide a quick 15-minute update, and then we will open the lines for your questions. Please note that this call is being recorded and is for financial professionals only. If you need assistance, dial *0, and an operator will be happy to assist you. With that, I turn the line to Professor Siegel.
Professor Siegel: Yes. Thank you. We can be nothing more than shell shocked with the volatility in the market. These are historical numbers. The Dow falling just short of a 13 percent.
I'm looking at my record book. I think that's the second biggest percentage fall right after that, the big 1929 where the Dow fell 12.28 percent, and then on the 29th, continued probably 11 percent. But now we've exceeded the 1929 one day stock crash.
What is also of historical interest is that this is by far the worst crash associated with news. And I'm looking at news events going through the history of World War 1 .7 percent declines that one day. For those of us, remember the attack on the Hong Kong Dow and October 27 ‘97, that was also a 7 percent debt. By the way, was 7 percent today when the markets reopened after 9/11. 7.13 percent decline. And then there was just about a 7.2 percent. The crime when the House voted down the 700 billion dollar bail package, remember that shortly after the Lehman bankruptcy amendment just going past here, the numbers are almost twice as big.
Which, of course, indicates that this is totally unprecedented. We really had nothing like it. Yes, we had a pandemic in 1918, been quite anywhere, quite a brief recession.
I don't have exactly the stock market decline. There was some but nothing of the magnitude that we have today. There also wasn't the close downs that we had today. And that unfortunately probably led to more. Gaps then were could have been achieved. We can, and about the fact that we probably could keep the economy going better at the close to more dark deaths, but shut down to try to eliminate the virus. Obviously, the way to go. Let's let me make some comments over here. Was this Mohammed Al-Arian this morning? He criticized the Fed's action. I think that criticism was wrong. I think pretty sad last night did exactly the right thing. Yes, the market went down afterwards, Yes, we are out of conventional bullets, so to speak.
But one shouldn't have illusions that the, you know, the Fed could solve a situation like this just wholly by monetary policy. The good news here is the fact that markets are operating. Trading is taking place. There is no follow ups in the two EPS.
Volume, of course, is high so people can get a pretty big chunk of that prices that we saw on the market actually rallied quite a bit by noontime and then fell back again in the evening, probably because these openings have been so weak. No one wants to be too long overnight.
So, there's a lot of defensive selling at this point. Also looking at my screen, the VIX has just overtaken Haiti. I think that's almost exactly the level after the Lehman crisis. So, we had hit 50 a few times.
Another episode of the 1987 stock crash was actually higher on that one day the 19th and then the 20th. They actually got even higher than this, but we are now at a fixed rate, which is that level.
So it's a huge difference with the amount of capital that is that is taking place.
Couple things to keep in mind right now where we're selling at levels that are around 15. Fourteen, fifteen times last year or.
That's actually probably lower than the average of history from 1870 onward.
Now, I'll bring that up for a moment, but so we wipe out this year's earnings and it's very hard to know how much wages are going to go down.
I mean, how could they go down to zero? Yeah. Here it theoretically could pick how long they've shut.
So you're looking to 2021 or can we return to earnings by 2020? What things going back to normal? Talking about vaccines and etc. and so on in the history of viruses suggests that they're selling in fifteen times next 2021 earnings if they're no better than this year than last year's just sixteen thousand two thousand ninety.
So forget about whatever growth we would have or whether well, we haven't. 2021. I think we eliminate the virus. You know, we could. People's confidence comes back. We could see nice growth, but you can see that there are levels. Those are levels that are extremely attractive. There are levels that are 7 percent after inflation returns when you get to 50 PE ratios. So if you know I am at 20, you could get a 5 percent. We only turned 15 and you get a 7 percent and this is long run. It's not year after year. Really compound. It would also be unprecedented because you have zero interest rates our base.
So you're hearing you're going to get a 7 percent real return in a world of zero interest rate. It's an equity premium, a huge amount. And that is, of course, what we call the equity risk premium. And it's extraordinary at this particular point in time, as one would expect with a with a mix of 80.
It is true that there's usually a premium to hold equity with this degree of volatility and uncertain. Let me go back. The markets have function now. The market come weekly. There was talk of Mohammed El-Erian inside. Thing is that they should have concentrated on targeting particular dysfunctional markets.
First of what is often been mentioned today and later last week was the commercial paper market, which has come to a standstill. It did come to a standstill after the Lehman crisis. And we had a Treasury Fed facility. This requires Treasury approval. I don't think it will be most difficult to obtain to get a facility that would loan and facilitate commercial paper so that we make sure that banks can still float short term commercial paper and don't have to draw down on the lines. Fortunately, the banks and this does show you how well we shot that Zorpette.
The financial sector, the ability to go through this. And yet, you know that they still have their share of ratios are still looking extraordinarily good, is that we get an awful lot for a takeover of a real shock that again, is unprecedented in nature.
I like the fact we lowered 100 basis points. It can help with loan rates. It's marginal.
I mean, obviously, it's not going to solve the crisis. We're talking about fiscal. Government's fiscal policy. There's discussion of a thousand dollar.
Every individual taxpayer is going to be hammered out. The problem with being a return waiting on proper administration of a payroll tax exclusion for the year is that Gribbles in over the year, while we have the shock, the confidence now in the shop tax income now hopefully we'll be getting back to work later in the year. So why not front load it as much as possible? It is fortunate. Know we have a thousand hours to receive 200 million people. That's 200 billion dollars. That's not all that hard given. We have a deficit of 1.2 trillion.
So we're on really, really less than 20 percent of the deficit to actually get a thousand dollars. And every person hands as a as a tide over at these interest rates. I think it will be a big trouble. I mean, certainly on the deficit side, I don't see any problem there. What what else to say? I mean, basically everything has gone down. If we you know, just you know what defensive sectors, interestingly enough, of the 11 competing categories I'm looking at today's performance, the worst was Rieck REIT. You know, people think that rates are real estate has a lower base and that's not have a lower base. Then the financials with the lower interest rates infotech and was worth and energy also was hit. They're all down about those. Those three are all down 13 percent. Now, these consumer staples index down 7 in health care down. And utilities are actually down eleven point five with with a twelve percent market just to go over. What sectors have been defensive?
Obviously, I believe that that one will merge those that have strong dividends. Yeah, I know that.
I do want to mention one of the things that I'm going to bring it over to Q&A because we promised you 15 minutes of Q&A. The the energy sector is definitely in difficulty, to say the least. We had West Texas. I see WTI settled down about 10 percent at twenty eight dollars. Sixty four cents. That's almost the panic low that we had in 0 6. We are down there. Now, one of the differences is that Brant is down below 30, which usually sells for three, four, five dollars premium over West Texas. The reason why that is premium is way down is that Saudi Arabia offering the Europe the low, low prices. And that's what's squeezing that Brant down to the WTI level. But now we're. Yeah. Yes, that's the good news.
And on the energy front, it as a result of the last crisis, they did lengthen the maturity of a lot of their debt. But at these prices, they're underwater and they won't be able to refinance. But most of the debt does not come through do this year.
It comes next year, which is a good sign. You know, they can close up and burn cash enough. They don't have to refinance.
But the truth of the matter is, as much of the debt in this industry is now selling at 50 cents on the dollar.
I mean, the one thing that shocks is shocking in terms of credit is that a company like Exxon Mobil, which I believe is still triple-A rated and one of the only three or four companies in the world that is triple-A rated and I think was crushed to sell by one or two brokerage firms. It closed at thirty four dollars and fifty cents after falling at the lowest thirty three this morning. It is a 10 percent dividend yield on a company that's never. Has lowered its dividend. I mean, I am not going to go back to the 30s.
But back in the data that I have not only never lowered its rates every single year, and now this company is selling at a 10 percent dividend.
These are totally unprecedented in the energy sector. We are seeing things that we have never really seen before.
I mean, I don't even remember it during the many of the peak oil crisis situations. A sector that was in difficulty beforehand. But now clearly. But the one two combination of the economic slowdown and the price the price war between Russia and Saudi Arabia, plus the negative image of the industry and the global warming, and you can just pile on as much as possible.
I have no idea. Because someone got to see, you know, we may pull back and come back and save it. It is great.
How far down can this go? We have clearly a major bear market is described as 4ish percent. However, we've had several clearly the financial crisis. We have 50.
But I guess that was much worse in many ways to bounce back and everything else from a fundamental standpoint. Couldn't we go down for you? That's another 10. Clearly, 10, 15, 20 from now going down more, so you need to be down 30 to go down 40. Need to go down about fifteen or sixteen to go down that far. Yeah. We could get down to what's called major bear market territory that would bring it down to 12, 13 times earnings. Yes, we have been lower than 12 and 13 times earnings. The noise hasn't been lower. Twelve or thirteen tracks earnings is when you could get 14 percent under US treasuries instead of zero today.
We've never been down in those levels. You know that other than that. So let me send it to you. And I'll do my best to answer those questions.
So, operator, if you could ask more questions.
Operator: OK. If you wish to answer question on the audio line, please, key star and then 1 on your telephone. If you decide to withdraw your question, if it has already been asked simply key star two questions will be answered in the order received. You'll be advised, went off the question, or other life will remain on a list. So just reminder to ask an audio question, please. Key star and then 1 on your telephone. Okay, our first question. Please go ahead.
No long term mortgage rate right now is two and a half percent. Can it go to 2 percent or even lower?
Professor Siegel: He had to say, actually, I have been talking 30 years, 30 years, about three and a quarter.
Right. I'm understanding any. But that's OK.
Ten years probably, too. And it will go lower and we get tenure. It's more sensitive, too. So the lower the ten fifteen years and shorter are very sensitive to that short term rate that the Fed took. The Fed will be not 100 basis points, definitely an impact that. Downward. Yes. OK. Thank you. Yeah.
Operator: OK, next question is from Fred Blaine. Fred, go ahead.
Fred: Yes. Well, thank you for your comments. I wanted to have you comment on what I perceived to be a liquidity crisis. It seems to me that everything's being sold almost illogically when gold is down. You and the government binders down in the face of what's going on. This strikes me as more of a liquidity crisis than anything else. We obviously have a lot of outstanding debt concerns. Can you comment upon the role of liquidity and what's including this strong Garwood market and all the volatility associated with it?
Professor Siegel: Yes, it goes down 2 percent today. And everyone is blessed. Wealthy. You're just less wealthy. I'm holding everything high.
What does one mean by a liquidity crisis generally, does that mean there's any means but in terms of traded assets? It means that the bid ask spread out just enormously wide and business can't be done.
Now, I'm sure if you want to sell a big chunk of stock, you're going to take a discount in times like this. But the truth of the matter is for ordinary people selling, I mean, even wealthy people selling, you know, one hundred thousand eight hundred fifty two hundred thousand million dollars worth of stock. In fact, the volume is big enough to absorb it at current price. It's much lower prices, but it's there. And then when you look at these prices, you name your company Microsoft and you see once thirty-five forty you can sell a thousand shares at one thirty five forty at that instant. [00:21:35][37.1]
That's to me, liquidity. The fact that it's going down represents an assessment of risk and fundamentals, but not liquidity.
In my opinion, you know. And by the way, I am strongly opposed to closing any of these things open and allow people to trade. I know a lot of people are going short automatically. Let me tell you, when this when the news turns around, you'll see a snap back. Well, now all those shorts are you even saw all of that on Friday. You know, after a pretty decent news conference that Trump held with all of his first decent news conference on this item, in my opinion, you know, you really. Wow. Parker was up like 10 percent in a matter of a half hour or so. Yeah, a lot of people are short and they think it's a one way street. And, you know, that's the battle. And by the way, those people that disagree are. They're the ones that liquidity in the market that the trading. You think you can get you can get up. I wouldn't I would say a long-term investor. I wouldn't get out.
But, you know, you that in my opinion, this is not the case where you're getting a liquidity.
I'm sure some of the corporate bonds and certainly some of the distressed but distressed ones are always going to their bid.
Ask spread. I definitely like. You become a junk bond because then you dump on the stock. I mean, the oil companies now are trading stocks and they all stop and I'm talking about Exxon Mobil. But some of the lesser ones are really just trading about the money. Call a way out of the money calls and their bonds or whether it's actively trading. And they're kind of trading in stocks, not the company. And that's something that's actually true for history. So, in my in my definition, yes, that's really low that you can trade at these prices.
Operator: OK, our next question comes from Jimmy Sanchez. Jimmy, live in the call, please go ahead.
Jimmy: Thank you very much, Doctor, out of question. Historically, U.S. inflation ever traded high above the yield curve.
Professor Siegel: Well, we have inflation going into this crisis at about one and a half to 2 percent. And the terror here, you saying, you know, is now in a well at the 10 year, half a percent. Now three quarters. No. I mean, what we've had is a number of phenomenon. I talked about this, a number of my write ups and lectures.
We have the long-term interest rate has become a favorite asset of investors that as a result, it is what we call negative bad assets. And that's why it's been driven up in value, went down yield. And although historically it sold much closer to the rate of inflation. Now it's selling considerably below the rate of inflation.
And actually, I think it's likely that that will happen.
I think in the future, too, because of the nature of the long bond turning into what's called the short run hedge at.
No one is one. There's an interesting comment here and I want to address this. But absolutely, the yields are slightly up on that long bond today. And with that, you know, a pretty bad crash in the stock market.
What we are witnessing right now in the long-term bond market, in my opinion, is reflecting a concern about a big new supply. There's going to be a fiscal package. It's financed by the Treasury floating bonds. So, there is a little bit of concern in the bond holders that they might be asked to take on quite a few hundred billion dollars worth of new bonds. And that is, in my opinion, why we have had a disconnect on the long bond against the stock market over the last four or five days that this company is not dysfunctional. It's, in my sense, perfectly rational, given that there may be a big supply of funds coming through as part of the fiscal stimulus
Operator: Our next question comes from Eric of Grand. Eric Litvinenko, please go ahead.
Eric: Yeah, just to comment on that or get your comments on the AGG versus and Treasury. Where would you rather be?
Professor Siegel: Well, when you got an AGG and you got corporate, you're getting corporate risk in there. So, you're getting a little bit of that stock market sell off. If I was a long-term investor, I’d want that exposure. Well, what in the short run, though, if the market goes down over 20 percent, it'll definitely underperform.
You know that the AGG is, you know, it's the biggest negative eight is a Treasury alone.
And then as you keep on moving up, you go from negative to zero to slightly positive as you keep rising. So, you get stock exposure.
I mean, you know, junk bonds in times of crisis.
I mean, I think, you know, I mean, I said in my lifetime ban, many of them where, you know, you reinvest those huge differently in the zeal to get up as high as they do now. The whole structure is lower, but they're still going to be giving these four, five, six, seven percent yield payment crisis. And then it when they recover, you get much more shares because things are really well under dollar price averages.
But again, they're closing. You know, the junk bonds are closed. They stopped and corporate now. I mean, look at this. I think so. Hey, this is I'm looking at ExxonMobil, which is a triple-A corporation.
And in the last week, in a week and a half. It's thirty year to twenty forty nine.
It went from one hundred and ten dollars to ninety five dollars, and that's all equity aggressive. I need just a little bit of a little bit because it should take a little bit. But almost all but this oh my God. A trip away at risk. Well, a triple A in the oil patch. Yes, Tripoli. And the oil patch is rich. But that's, you know.
So you're going to be getting a little bit of you're going to get a little bit of without risk, that equity risk in there. So it's a choice to make about whether you want that exposure.
I think we have. It wasn't a bad idea, I think, for one more question.
As having went on the way that we had Coleman go back in the call.
Coleman: Thank you. Coleman Goldsmith. In ’87 we had a lot of companies by about their own stock when we saw these prices drop as they did. Do we expect coming up? Are we disappointed or something like our house was up and jumped off?
Professor Siegel: Don't forget, the ‘87 stock crash was an internal problem of not quite a recession at all and no followed by one. So, the companies did not have concerns about their cash flows.
They just saw we did ourselves up high. And then all of a sudden the long bond started collapsing. You'll want to over 7 percent. People say, just a minute. You know, we should be selling at this level. And then it kicked off to a black 0 because people thought their portfolio insurance and the futures market played on the other. And that's that caused a vacuum in doubt. But the truth of matter was that the corporations say business is fine. You have the same cash flow. I can I can pay that, give it amounts to different.
What is the cash flow of these corporation? You know, they got to pay their bondholders don't pay all their employees and you know it. You don't do buybacks going and cover their dividends. I think there's enough to cover dividends. Some will be slashed. But, you know, the buy are limits up or that's the residual. It's going to it's going to separate now the firms that see the bounce back and when the optimism comes and the price is still very low, I'm sure they will be doing it. But you're not going to get it. Very much of it here in the short birdshot virtual where they have a lot of care, analysts think, OK.
Now, that is absolutely right. So, there is a case key the question, but group Brookshire can buy back its own or buy back stocks that you know.
I mean, like I always said, I'm waiting. I'm waiting, you know. You know, I don't often talk about the excitement when the market crashed in 1974 and that he you know, he was in cash completely.
And he said, you know, it's just like a treasure hunt where the gold was all just lying around right on the surface.
I was never more excited. He has the cash to buy the companies and the stock. He could buy his own stock if he thinks it's selling at a big discount relative to that, or he can buy the stock itself. And I would be you know, I'd be disappointed at these prices.
Thank you. Thank you, folks. We don't keep you. We know it's a stressful time. Thank you for being with us. And we plan another update next Monday. Thank you.
Brad Krom: Great, thank you very much, Professor. And now on behalf of everyone at WisdomTree, I'd like to thank you all for joining us. Baits called as a professor mentioned. We'll be holding the next one of these discussions to get Professor SIEGEL up on the markets next Monday at 4:00 Eastern. And in the meantime, please reach out to any of your WisdomTree representatives. If you have any additional questions for that. And good luck to everyone in the market this week. And we look forward to speaking to you. Thank you.