Every quarter, WisdomTree Investments holds a quarterly review and outlook conference call with our Senior Investment Strategy Advisor, Wharton Professor Jeremy Siegel, where listeners can submit questions ahead of time and help drive the content of the call.
In this blog, we review the most pressing economic and market issues that were discussed during this quarter’s call.
Question: A major question has been central bank activities and how that impacts the markets. What are your current thoughts?
Yes. Very important. Does anyone doubt how important the U.S. Federal Reserve (Fed) is to what moves the markets? Every little hint on what they’re going to do, every little move on who’s going to be the next Fed chairman, with Janet Yellen being seen as more of a continuum of Bernanke’s easy money policies and Larry Summers being tougher on that score, which might actually not be as true as thought. Nonetheless, these are the market-moving issues.
Let me say to start—and I’ve said this now for over a year and a half—the Fed is important for stock prices, but this bull market in my view is driven by valuation and earnings, particularly valuation. What I believe is going to move the market up is not so much earnings—and earnings growth is up a few percent; ok but not great. I believe it is going to be valuation improvements that drive the market. The reason is because alternative investments, even with the recent increase in interest rates, are still extremely low from a historical standpoint. I believe the current environment justifies valuations of 16, 17, 18 on the market; not just the historical 15.
Question: Who do you prefer to be the next Fed Chair to replace Bernanke?
First of all, I could live with either Larry Summers or Janet Yellen. I think both of them are extremely good economists. I know Larry Summers very well. I don’t know Janet Yellen as well, but I’ve read almost everything she’s written.
I prefer Janet Yellen. I think she’s much better at bringing a sense of commonality to the Federal Open Market Committee (FOMC), which is something that Bernanke has really done a great job with. Almost everyone, whether they’re hawkish or dovish, has praised Bernanke’s willingness to be all-inclusive in the discussions.
The major problem with Larry Summers is that he’s extraordinarily bright but often goes off on his own opinion and runs the risk of not listening closely to other FOMC members. I believe that Bernanke himself will recommend Yellen and the FOMC will recommend Yellen. I think that will carry the day.