Jeremy Siegel makes compelling case for stocks

I had the pleasure of sitting in on a lecture yesterday by Dr. Jeremy Siegel (Thanks Gavin!).  If you’re not familiar with Dr. Siegel he is a professor, economist, author, and all around expert on the stock market.  He has degrees from Columbia University & MIT and has taught at the University of Chicago & the Wharton School of Business.  He is probably most famous for writing a book called Stocks for the Long Run.

Dr. Siegel
Dr. Siegel

In his talk yesterday Dr. Siegel made one of the most compelling cases for stocks that I’ve heard in today’s market.  He had a lot of interesting points.  Here are my cliff notes from his presentation:

*If an investor would have invested $1 in 1802 and “let it ride” until today in the following asset classes here is what that $1 would be worth today (note: this is inflation adjusted, assumes dividends/ interest are reinvested):

  • Stocks: $495,522 (6.6% annual inflation adjusted return)
  • Bonds: $1,295
  • T-bills: $302
  • Gold: $2.69
  • US Dollar currency: $.06

Based on Jeremy’s research he believes that the S & P 500 has another 25-30% rally before it gets back to the 1802-2009 trend line (the regression of returns over those 200+ years).

*Dr. Siegel predicts that inflation in the US economy will remain tame for the next 2 years but creep up to 4-5% by 2012.

*He is predicting that the Fed will begin raising short-term interest rates in the Spring of 2010.

*He forecasts 4-5% GDP growth for the 4th quarter of this year.

*He expects the headline unemployment rate to increase even though the economy is improving as we head into 2010.  Why? The current unemployment rate of 10.2% is based on people currently looking for work who can’t find it.  As job prospects improve with the economy more discouraged workers (those who are unemployed but NOT looking for work and not counted in the 10.2% rate) they will reenter the jobs market but companies will be slow to rehire.  As a result, the unemployment rate will rise.  This is not a bad sign.

*Dr. Siegel pointed out that with low home prices and low interest rates home affordability is at an all-time high.

*He is bullish on emerging markets such as China & India.  He thinks that a stock portfolio allocation of 30%-60% in foreign stocks is NOT out of line.

*Lastly, he is not surprised to see the US Dollar weakening.  Before the financial crisis the US dollar was at all-time lows versus foreign currencies (summer 2007).  With the crisis investors sought safety in the US Dollar driving it up from 2007-2009.  However, as the economy improves investors are accepting greater risk which means the Dollar is reverting to the levels of 2007.

Obama signs legislation extending and expanding homebuyer tax credit

If you haven’t heard, the United States Congress and President Obama have passed legislation that expands the first-time homebuyer tax credit and extends it into the first half of 2010. Before we go any further, we want to make it clear that we are not tax professionals and recommend that you contact a tax professional to see how this law may apply to you.

Initially, the first-time homebuyer tax credit came into law as a part of President Bush’s Housing and Economic Recovery Act of 2008. In the original form, first-time homebuyers were eligible to receive up to $7,500 in the form of a tax “credit” but were required to pay back the credit over a 15-year period.

Earlier this year President Obama signed into law the American Recovery and Reinvestment Act of 2009, which increased the maximum amount of the tax credit to $8,000 and eliminated the payback provision. To be eligible for the credit, homebuyers must have not owned a home in the previous three years, must close on their purchase no later than November 30, 2009, and must make less than $75,000 for individuals and $150,000 for households.

Under the new law, the first-time homebuyer tax credit has been extended, and a $6,500 tax credit for existing homeowners has been added. Here are the details:

· Eligibility criteria for the first-time homebuyer tax credit have not changed: a homebuyer must have not owned a home in the past three years.

· To be eligible for the $6,500 homebuyer credit, homebuyers must be buying their primary residence and have lived in their existing home for at least five of the previous eight years. (The credit is not available for vacation or investment property purchases.) Homebuyers do not have to sell their existing home to be eligible for the credit.

· The credit is available to homebuyers who qualify, as long as they enter into a sales contract no later than April 30, 2010 and close no later than June 30, 2010. The $6,500 existing homeowner tax credit becomes effective December 1, 2009.

· In addition to expanding the tax credit to existing homebuyers, the new law raises the income qualification thresholds to $150,000 for individuals and $225,000 for households.

Although many critics have pointed out that the extension and expansion of the home-buying tax credit is poor public policy, there is no question that it offers a unique opportunity for existing homeowners to purchase a new home with a generous government subsidy.

Mortgage rates remain near historic lows and, according to the Case-Shiller Home Price Index, real estate prices in the Portland-Metro area remain 20% off their July 2007 highs. If you’ve been considering a move, this may be your once–in-a-lifetime opportunity. Please contact us if you’d like to review your loan options and obtain pre-approval.

Here is a link to the section of the IRS website which summarizes the new law.