Gary Shilling, economist and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation”, forecasts a market crash in 2013. In a January, 2013 Forbes article, Shilling says we could see an S&P 500 decline to 800 in 2013. (S&P 500 is 1,633 at the market close on May 10, 2013)
Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School and author of “Stocks for the Long Run,” forecasts the Dow could surpass 16,000 by the end of 2013. (Dow is at 15,118 at the close on May 10, 2013)
Both Dr. Shilling and Professor Siegel have been studying market trends for decades. Yet, their forecasts for 2013 are diametrically opposed.
Shilling became a bond bull in the early 1980s, enjoying stellar returns on rising bond prices as bond yields slid from 15% to less than 2% on the 10-year Treasury bond. He recommends selling stocks and buying treasuries to benefit from rising bond prices as yields he believes will continue to fall.
In an interview with Steve Forbes, “Gary Shilling: Why You Should Sell Stocks and Buy Treasurys”, Shilling talks about how deleveraging, paying down debt, will keep a damper on economic growth for the next 5 years. As consumers focus on reducing their debt and strive to beef-up their savings accounts, the amount of dollars available for buying goods and services will be reduced. Dr. Shilling expects 2% real GDP growth in the U.S. and not much more in any other country in the world.
That leads to what he calls the “grand disconnect”. The disconnect is the difference between this slow growth and investors’ enthusiasm for stocks and low-grade securities that is an outcome of the central bank ease that has investors saying, “I couldn’t care less about the economies on the ground, as long as the central banks are shoving money out the door. Don’t fight the Fed.” At some point he believes there will be an unexpected event to kick off the selling, sending stock prices lower……. much lower.
Siegel on the other hand believes one should be in stocks for the long haul. He believes stocks will return at least 16% in 2013. Why will stocks continue to rise? In large part because bonds have such low yields. Stocks should have a higher Price-to-Earnings ratio when the “major alternative” – bonds – have such low yields, according to Siegel’s research. He expects Corporate America to increase earnings and the economy to continue to recover. Investors will be willing to pay a higher price for stocks under these circumstances. He believes this expansion of P/E multiples will be the driver of higher stock prices, more than any increase in corporate earnings that may occur. To view the video interview, click here.
Compelling forecasts on both sides indicate this is a time for caution. Here are 3 tips to help protect your investments:
Review your portfolio to be sure your long-term allocation between stocks, bonds, and cash is where you want them to be. The recent run-up in stock prices may have your portfolio too heavily weighted in stocks.
Take a hard look at the duration of your bond funds. You can find this information in the prospectus or in the fund’s Fact Sheet. Rising yields will have a lesser impact on short- and intermediate-term duration funds, those of less than 5 years for instance, than on funds with a longer duration. For more information on bonds, see my post Playing It Safe With Bonds.
Cash is returning zero but it won’t lose value if either stock or bond prices decline. If you have new cash to invest from a bonus, inheritance, or 401k rollover, you may want to ‘wait and see’ before investing some or all of it. This is particularly true if these are retirement funds that will be needed in the next 5 to 10 years. Like the proverb reminds us, “a bird in the hand is worth two in the bush”.