Robert Shiller and Jeremy Siegel Debate Valuations

By on March 10, 2010

The Wall Street Journal examines the views of several pessimists (Shiller, Rob Arnott, and Ben Inker) and an optimist (Siegel).

One concern of pessimistic analysts such as Mr. Shiller is that despite the two bear markets, stocks have spent almost all their time since 1991 priced above historic averages. History suggests that when stock prices are high, performance in ensuing years is disappointing.

Jeremy Siegel’s opinion:

“My research shows that the common P/E is 18.5″ when the economy is coming out of a recession, he says. The way he looks at it, the market now is trading at about 14.5 times forecast 2010 profits, making it cheap compared with the typical P/E of 18.5. If stocks rise to 18.5 times profits, the S&P 500 could rise to 1400 this year, a 23% gain from today’s level, he notes. “We could easily see 10% to 12% stock returns with low inflation” in future years, he says.

SMA Comment: The prevailing view of the pessimists, who should probably called realists, is that the S&P 500 is worth about 900. The article explains in more detail Shiller’s approach in using 10 year average earnings to project the current state of valuation. A basic analysis of emerging market valuations (specifically Chinese shares) is enlightening. PetroChina, China’s version of Exxon Mobil Corp., has a market value of about $345 billion based on its Shanghai price, above Exxon’s $315 billion, though it is half as big in terms of revenue.

Source: The Wall Street Journal
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