future for investors prof. jeremy j. siegel ~ the wharton school fpa symposium ~ may 23, 2006
TRANSCRIPT
Future for InvestorsProf. Jeremy J. Siegel ~ The Wharton School
FPA Symposium ~ May 23, 2006
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel2
The Verdict of History
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel3
STOCKS$666,180
BONDS$1083
BILLS
$293
GOLD$1.62
DOLLAR$0.06
$0.01
$0.1
$1.
$10.
$100.
$1,000.
$10,000.
$100,000.
$1,000,000.
1801 1811 1821 1831 1841 1851 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001
January 1802 – December 31, 2005
Total Real Return Indices
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel4
Annual Stock Market Returns
Real Returns
Long-Term
1802-2005 6.8%
Major Sub-Periods
I 1802-1870 7.0%II 1871-1925 6.6%III 1926-2005 6.7%
Post-War Periods
1946-2005 6.8%1946-1965 10.0%1966-1981 -0.4%1981-1999 13.6%1984-2005 8.1%
Updated through December 31, 2005
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel5
Annual Bond Market Returns
Real Returns
Long-Term
1802-2005 3.5%
Major Sub-Periods
I 1802-1870 4.8%II 1871-1925 3.7%III 1926-2005 2.2%
Post-War Periods
1946-2005 1.4%1946-1965 -1.2%1966-1981 -4.2%1981-1999 8.4%1984-2005 6.0%
Updated through December 31, 2005
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel6
Projected Equity Returns
Earnings Yield, or 1/P-E ratio, is excellent long-term predictor of real stock returns.
Average P-E ratio in last 130 years = 15; average earnings yield 6.7%.
S&P 500 Estimate of next 12 months operating earnings $85.22 (end 4Q06)
S&P 500 (May 15) = 1287 P-E ratio 15.10, earning yield = 6.62%.
If you take reported earnings, estimate $76.41, for a P-E ratio of 167.84, EY of 5.94%
If you take core earnings estimate $76.44, P-E ratio 17.06; earnings yield 5.86%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel7
Bond Returns and Equity Premium
Ten year at 5.15%, 30-year at 5.26%
If we subtract 2.5% for inflation, we get a real yield of 2.65% and 2.76%.
TIPs yields are 2.46% and 2.39%.
Equity Premium is almost 4% now.
Long-Term Equity Premium = 3%.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel8
The Future for Investors
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel9
What Happened to the
Original S&P 500
Formulated in 1957?
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel10
Change in Sector Weights 1957-2005
Financials
Health Care
Information Tech
Consumer Staples
Telecom Svc
Utilities
Industrials
Consumer Discretionary
Energy
Materials
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
57
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel11
Portfolio Performance
The dynamic, updated, S&P500 Index that serves as a benchmark returned 10.85% per year from March 1, 1957 through Dec. 31, 2003
A portfolio of original companies, where no transactions took place except for reinvestment of dividends, returned 11.40% per year, and did so with lower risk!
Why? New firms overvalued when put in index. New firms Lagged in 9 of ten sectors.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel12
Twenty Top Performing SurvivorsReturn Rank 2003 Name Return EPS Gr
Avg PE Ratio
Dividend Yield
1 PHILIP MORRIS COS INC 19.75% 14.64% 13.15 4.07%2 ABBOTT LABS 16.51% 12.43% 21.26 2.25%3 BRISTOL MYERS SQUIBB CO 16.36% 13.24% 23.64 2.87%4 TOOTSIE ROLL INDS INC 16.11% 9.09% 16.54 2.44%5 PFIZER INC 16.03% 10.94% 24.55 2.45%6 COCA COLA CO 16.02% 10.57% 27.40 2.81%7 MERCK & CO INC 15.90% 13.11% 25.54 2.37%8 PEPSICO INC 15.54% 9.57% 20.38 2.53%9 COLGATE PALMOLIVE CO 15.22% 7.84% 21.66 3.39%10 CRANE CO 15.14% 6.93% 13.28 3.62%11 HEINZ H J CO 14.78% 11.00% 15.30 3.27%12 WRIGLEY WILLIAM J R CO 14.65% 7.49% 18.11 4.02%13 FORTUNE BRANDS INC 14.55% 4.26% 12.76 5.31%14 KROGER COMPANY 14.41% 6.25% 14.31 5.89%15 SCHERING PLOUGH CORP 14.36% 11.99% 21.41 2.57%16 PROCTER & GAMBLE CO 14.26% 9.20% 24.27 2.75%17 HERSHEY FOODS CORP 14.22% 7.36% 15.75 3.67%18 WYETH 13.99% 8.78% 20.98 3.32%19 GENERAL MILLS INC 13.77% 8.23% 18.00 3.20%20 ROYAL DUTCH PETROLEUM CO 13.64% 7.65% 12.52 5.24%
TOP 20 Average 15.26% 9.53% 19.04 3.40%
S&P 500 10.85% 5.98% 17.35 3.27%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel13
Top Twenty on April 10, 2006
Est PE Next Yr P-E Divd YieldMO 13.27 12.46 4.77ABT 16.71 14.96 2.79BMY 20.36 18.79 4.60TR 22.92 21.18 1.03
PFE 12.26 11.57 3.81KO 18.17 16.67 2.85
MRK 14.63 14.65 4.42PEP 19.74 17.78 1.90CL 20.22 18.18 2.06CR 16.10 14.63 1.26
HNZ 18.39 16.86 3.14WWY 23.74 21.59 1.91
FO 14.94 13.34 1.86KR 14.08 13.08 1.15
SGP 34.00 23.52 1.21PG 21.83 18.98 1.97
HSY 19.54 17.69 1.89WYE 15.70 14.36 2.11RD 9.85 10.36 3.50GIS 17.04 15.89 2.67
Average 18.17 16.33 2.55Ave X SGP 17.34 15.95 2.62S&P500 18.05 15.40 1.78
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel14
Consumer Discr
Consumer Staples
Energy
Financials
Health Care
Industrials
Info Tech
Materials
Telecom SvcUtilities
S&P 500
y = 0.0753x + 0.1095
R2 = 0.3187
0%
2%
4%
6%
8%
10%
12%
14%
16%
-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
Sector MV Change ReturnConsumer Discr -3.28% 11.09%Consumer Staples 5.23% 13.36%Energy -15.68% 11.32%Financials 19.87% 10.58%Health Care 12.14% 14.19%Industrials -1.13% 10.22%Information Tech 14.71% 11.39%Materials -23.06% 8.18%Telecom Svc -4.00% 9.63%Utilities -4.81% 9.52%
S&P 500 Sector Market Value Expansion versus Total Return
Growth Does Not Guarantee Return
*
Info Tech EX-IBM(16.2%,10.6%)
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel15
Single Best performing Stocks Top Performing Stock From 1925-
2005– Philip Morris, Return 17.49% vs. 10.00%
Market. Top Performing Stock From 1950
– Philip Morris, Return 18.05% vs. 11.38% Market.
Top Performing Stock from original S&P 500 in 1957– Philip Morris; Return 19.88% vs. 10.73% for
S&P 500. $1,000 put in S&P 500 when it
was founded would turn into $145,352 by the end of 2005.
$1,000 put in Philip Morris at the same time would grow to over $7.0 million.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel16
Dividend Yield and Relative Performance
$ 72,068
Low Div Yield
$ 82,341 $113,894
$351,581
High Div Yield
$517,188
$144,996 S&P 500
$1,000
$10,000
$100,000
$1,000,000
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87
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95
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97
19
99
20
01
20
03
Dividend Yield Return Risk
Highest 14.22% 19.09%High 13.28% 16.49%
Middle 10.60% 16.35%
Low 9.84% 18.57%Lowest 9.53% 23.52%
S&P 500 11.17% 16.84%
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel17
The Aging of the Population
The Most Critical Long-term Economic
Issue Facing the Developed World
The Next Fifty Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel18
Long Term Demographic Trends
U.S. Life Expectancy and Retirement Age
56
60
64
68
72
76
80
1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
Life Expectancy
Retirement Age
Past marked by (1) rising life expectancy and (2) falling Retirement Age
But this trend Cannot Continue
1.6 Years 14.4 Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel19
Age Wave -- US
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel20
Age Wave – Japan
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel21
Big Questions
The Biggest Questions Facing the Developed
World
Who Will Produce the Goods?
Who Will Buy the Assets?
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel22
Retirement Age must rise dramatically
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age
56
60
64
68
72
76
80
84
88
1950
-195
5
1955
-196
0
1960
-196
5
1965
-197
0
1970
-197
5
1975
-198
0
1980
-198
5
1985
-199
0
1990
-199
5
1995
-200
0
2000
-200
5
2005
-201
0
2010
-201
5
2015
-202
0
2020
-202
5
2025
-203
0
2030
-203
5
2035
-204
0
2040
-204
5
2045
-205
0
`
14.4 Years
9.2 Years
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel23
Productivity Growth and Retirement
Can faster productivity growth help the Aging Problem?
Let us be extraordinarily optimistic and assume future productivity growth averages 3 ½ % per year, 70% above long term average of 2.2%.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel24
3.5% Productivity reduces retirement age 2-3 years
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age
3.5%Productivity
56
60
64
68
72
76
80
84
88
`
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel25
Immigration?
The number of immigrants to the US over the next 45 years needed to keep the retirement age in the mid 60s would be about one-half billion, far in excess of the current population.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel26
But there is Hope
Outside the developed countries, the population of the world is much younger.
Let’s look at India.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel27
Age Wave -- India
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel28
Trade Deficits and Aging
Throughout history, the “old” have sold assets to the young in exchange for goods.
Today in US, Florida’s retirees sell assets to and import goods from other 49 states.
In the future the US will sell its assets to the rest of the world.
Success depends on rapid growth in the developing world.
Western Europe 6.41%
U.S.4.68%
Low Income13.64%
Mid Income5.63%
Eastern Europe5.02%
Latin Am/Carib
8.57%
India16.66%
China21.05%
Hi Inc. nonOECD
1.12%
Canada0.51%
Aus / NZ0.38%
Japan2.10%
Sub-Saharan
Africa10.74%
Indonesia3.50%
World GDP 2000Population 2000
84.8%
15.2%
Western Europe
21%
U.S.22%
Low Income5%
Mid Income5%
Eastern Europe
5%
Latin Am/Carib
8%
India5%
China11%
Hi Inc. nonOECD
4%
Canada2%Aus / NZ
1%
Japan8%
Sub-Saharan
Africa2%
Indonesia1%
44.6%
56.4%
Western Europe
6%
U.S.11%
Low Income10%
Mid Income6%
Eastern Europe
3%
Latin Am/Carib
11%
India16%
China20%
Hi Inc. nonOECD
3%
Canada1%
Aus / NZ1%
Japan2%Sub-
Saharan Africa
7%
Indonesia3%
23.1%
76.9%
Population 2050 World GDP 2050
Western Europe 3.76%
U.S.4.26%
Low Income17.38%
Mid Income5.54%
Eastern Europe2.39%
Latin Am/Carib
8.64%
India16.86%
China15.68%
Hi Inc. nonOECD
1.32%
Canada0.43%
Aus / NZ0.33%
Japan1.17%
Sub-Saharan
Africa18.88%
Indonesia3.34%
11.8%
88.2%
0% 20% 40% 60% 80% 100%
U.S.
Western Europe
Japan
Canada
Aus / NZ
Hi Inc. nonOECD
China
India
Latin Am/Carib
Eastern Europe
Mid Income
Low Income
Sub-Saharan Africa
Indonesia
Per Capita IncomeRelative to US 2000
Per Capita IncomeRelative to US 2050
0% 20% 40% 60% 80% 100%
U.S.
Western Europe
Japan
Canada
Aus / NZ
Hi Inc. nonOECD
China
India
Latin Am/Carib
Eastern Europe
Mid Income
Low Income
Sub-Saharan Africa
Indonesia
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel32
Retirement Age with high growth in LDCs
U.S. Life Expectancy and Retirement Age
Life Expectancy
Retirement Age Developing
Countries High Growth
56
60
64
68
72
76
80
84
88
1950
-195
5
1955
-196
0
1960
-196
5
1965
-197
0
1970
-197
5
1975
-198
0
1980
-198
5
1985
-199
0
1990
-199
5
1995
-200
0
2000
-200
5
2005
-201
0
2010
-201
5
2015
-202
0
2020
-202
5
2025
-203
0
2030
-203
5
2035
-204
0
2040
-204
5
2045
-205
0
`
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel33
The Global Solution
The answer to our question: Who will produce our goods?
Who will buy our assets?
Is the same:The Developing Countries
By the middle of this century Developing Countries will
own most of world’s capital.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel34
Western Europe 25.88%
U.S.41.21%
Low Income0.53%
Mid Income0.53%
Eastern Europe1.14%
Latin Am/Carib
2.00%
India1.90%
China1.19%
Hi Inc. nonOECD
5.30%
Canada2.99%
Aus / NZ2.08%
Japan14.82%
Sub-Saharan
Africa0.38%
Indonesia0.03%
Western Europe 8.84%
U.S.16.59%
Low Income6.37%
Mid Income5.56%
Eastern Europe3.43%
Latin Am/Carib10.62%
India14.06% China
20.33%
Hi Inc. nonOECD
3.15%
Canada1.11%
Aus / NZ0.72%
Japan2.64%
Sub-Saharan
Africa4.23% Indonesia
2.36%
Stock Market Capitalization 2000
7.7% 92.3% 33.0%
67.0%
Stock Market Capitalization 2050
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel35
New Professors interviewed at Wharton in 2006
Day Date Type Candidate School Where From?
Thursday 12-J an MI CRO Pavel Savor Harvard Canadian from Latin America
Tuesday 17-J an MACRO Virgiliu Midrigan Ohio State Moldova
Thursday 19-J an MI CRO Camelia Kuhnen Stanford Romania
Thursday 26-J an MI CRO Vito Gala Chicago I talian
Tuesday 31-J an MACRO Emmanuel Farhi MI T French from N. Africa
Thursday 2-Feb MI CRO Gustavo Manso Stanford Brazil
Tuesday 7-Feb MACRO Santiago Bazdresch Yale Mexico
Thursday 9-Feb MI CRO Zhi Da Northwestern Singapore
Tuesday 14-Feb MI CRO Gustav Sigurdsson Princeton I celand
Thursday 16-Feb MI CRO J an Schneider British Columbia Germany
Tuesday 21-Feb MI CRO Peter Kondor London Economics Budapest/ Hungary
Thursday 23-Feb MI CRO Dana Kiku Duke Ukraine
Thursday 2-Mar MI CRO Yuri Tserlukevich UC Berkeley - Haas Belarus
Wharton Finance Department Recruitment Seminar Schedule: J anuary - March 2006
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel36
Growth and Stock Return in Emerging Markets
Emerging Markets
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Total Real GDP Growth
Do
llar
Ret
urn
China
CountryGDP
GrowthStock
Returns
Singapore 6.91% 5.23%Malaysia 6.75% 6.39%Korea 6.18% 4.66%Thailand 5.92% 6.41%Chile 5.90% 19.33%Indonesia 4.85% 5.84%Hong Kong 3.97% 10.77%Philippines 3.67% 2.09%Turkey 3.30% 10.02%Portugal 2.96% 3.71%Jordan 2.93% 3.88%Mexico 2.93% 22.31%Greece 2.73% 12.39%Brazil 1.80% 18.46%Argentina 1.40% 17.71%China* 9.30% -9.85%India* 6.06% 6.51%Sri Lanka* 4.52% 2.04%Poland* 4.42% 16.63%Peru* 4.32% 14.61%Israel* 3.67% 4.98%Pakistan* 3.45% 4.60%South Africa* 2.59% 10.47%Colombia* 2.22% 5.16%Venezuela* -1.03% 3.95%S
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Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel37
Conclusions
Price and dividend, not sector growth, fundamental to long-term returns
I believe that growth in developing world will offset slowing in aging economies and support future equity prices.
Do not jump into emerging markets without examining valuation.
These returns are far above what can be expected in bonds or even real estate.
Copyright Jeremy J. SiegelStocks for the Long Run and Future For Investors by Jeremy J. Siegel38
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