Is a recession already priced into equity markets?
The world-renowned economist Jeremy Siegel says it sure looks like stocks have discounted at least a “mild recession” amid this year’s downturn.
On Monday, the S&P 500 officially entered bear market territory, dropping more than 3% to a level more than 20% off its January peak. And as recession predictions continue to flood in from both Wall Street and Main Street, some sectors of the market have fared even worse.
The tech-heavy Nasdaq is now down over 31% since the start of the year, as even the most reliable tech stalwarts have seen dramatic cuts to their share prices.
Siegel, a professor of finance at the prestigious Wharton School of the University of Pennsylvania since 1976, told CNBC on Friday that the drop has put some stock valuations into a compelling range for investors.
“I actually think the market is already discounting a recession in 2023,” he said. “It’s being priced at that level today.”
Siegel noted that the S&P 500 is now trading at roughly 17 times forward earnings, and if you exclude tech stocks, the figure is even more impressive at just 13 times earnings.
“You rarely see it that low,” Siegel said.
For comparison, over the past five years, the S&P 500’s forward price-to-earnings ratio averaged roughly 18.6, but looking back over a 10-year period, stocks are trading roughly in line with the norm of 16.9.
Siegel was asked whether he thought it was fair to say that a recession has been priced in given that the S&P 500 has seen an average contraction of 31% in each recession since World War II.
“I think we’re pricing in a mild recession,” he responded. “I’m not saying how severe the recession actually will be.”
Siegel went on to explain that despite the recent increase in interest rates in many countries, the global economy remains in a much lower interest rate environment than was seen in the past, and typically, lower interest rates favor higher valuations. So, even though the market’s current price-to-earnings ratio is near historic norms, it’s evidence that investors are predicting a recession.
Siegel also questioned if the Fed’s rate hikes are enough to persuade investors to forgo stocks in favor of fixed-income investments in bonds or Treasuries.
“Even if the Fed’s interest rate is at 3% or 3.5%, is that real competition for the real asset that is stocks?” he said.
The professor argued that some dividend-producing stocks may begin to look attractive to investors as valuations fall and investment options remain limited.
“History shows that dividends move with inflation, so you’re still getting a real return,” he said.
Goldman Sachs analysts, led by David J. Kostin, also argued that dividend stocks may present value moving forward in a Monday note to clients.
“Dividend stocks look particularly attractively valued, in our view,” the analysts wrote. “Dividend stocks typically outperform in environments of elevated inflation. In addition, dividends currently benefit from the buffer of strong corporate balance sheets.”
This story was originally featured on Fortune.com
Source: finance.yahoo.com