Permabull vs Permabear

Andy Reynolds

Permabear – an investor who consistently acts in the expectation that the value of stocks and shares will fall. 1

Permabull – an investor who consistently acts in the expectation that the value of stocks and shares will rise. 1

During a recent interview on Yahoo! Finance, two of the most recognized economists in the world discussed their views on the US stock market.  Interestingly enough, they are both great friends yet consistently have significantly opposing views on the US stock market.  Over the past several years, we have followed both opinions to help us gather our thoughts on the markets.

Robert Shiller, generally described as a permabear, is a Nobel Prize-winning economist and Yale professor.  Similar to his longstanding stance on the market, he believes that the markets are in dangerous territory and the US markets could be nearing a correction sooner rather than later.  Shiller has created a valuation method referred to as the CAPE (cyclically adjusted price-earnings) Ratio which currently places the markets at levels only experienced in 1929 and 2000, both periods of time resulting in a major correction.

Jeremy Siegel, an MIT graduate and world-renowned Wharton finance professor could not disagree more.  He believes the Dow could rally to 24,000 by year-end, which is similar to his traditionally permabull mentality. Siegel believes that the market might be high relative to history but it is not high relative to the current fundamentals and current interest rates.  To support his 24,000 prediction, he does acknowledge that it likely will require corporate tax reform during this year.  Additionally, Siegel, the permabull, recognizes that future returns likely will be lower over the next several years relative to history.

While Shiller acknowledges that there may be a 1/3 probability that Siegel is correct, both agree on the investment opportunity that may currently be found abroad.  They both note that today investors need to strongly consider investing in non-US countries.  Siegel states that “half the world’s equity capital, stock value, is outside the United States… and that probably – when you look at India, China, emerging markets – is going to grow over time.”  It is interesting to see both a permabear and a permabull agree on an investment opportunity, specifically supporting diversification across the globe.

Shiller and Siegel both recognize that predicting short term returns in the market is very difficult.  At the end of the interview, Siegel stated that these ratios and data should be viewed over a long-term period, such as ten years.  He then noted that “when we are asked to appear on the major news media, where they look ahead a month or six months… I’m one of the foolish people who stick out my neck and actually give a prediction.”

So what can we take away from this interview?  1) Two of the most educated, intelligent economists in the world can have two very fundamentally different views of the same information.  2) Nobody knows where the market is going in the short-term and therefore we must consider all plausible outcomes when planning. 3) Diversification continues to be imperative to portfolio creation. 4) We must continue to monitor the pros/cons of a market pullback/extension and plan accordingly.

As we have been saying for the past 12 months, this is a great time to reevaluate where someone stands financially.  It is a great time to make decisions looking forward, acknowledging the opportunities and risks associated with the decisions.  If you or anyone you care about would like to chat, please do not hesitate to contact our office.



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