Last week, Wharton’s Jeremy Siegel added his voice to the growing army of stock market bulls for 2021. The professor of finance from the University of Pennsylvania is well-known in the US for his insightful market commentary.
His comments came with America’s Dow Jones Industrial Average (DJI) flirting with the psychologically important 30,000 level and trading near all-time highs. Meanwhile, in the UK, London’s FTSE 100 index has been up above the equally significant 6,000 level since early November.
I think these factors will lift UK shares too
The Dow moved from 10,000 to 20,000 over a period of around 18 years. But the climb from 20,000 to 30,000 occurred in less than four. Is that too far too soon? Not according to Siegel. He pointed to three factors set to keep the market moving higher.
Firstly, he thinks there’s a record amount of liquidity sloshing around from investors and consumers being held back by the Covid-19 pandemic. And I reckon that could be right. My guess is many people have been refraining from buying both goods and shares. And we could see pent-up demand stimulating the world economy and the stock market next year.
Siegel’s second factor is better-than-expected progress with vaccine development, which could suppress the virus soon. And thirdly, he sees the outcome of the US election as positive and likely to stimulate shares. If he’s right, and the US markets continue their powerful rally in 2021, I think that situation could help stimulate the FTSE 100 and other shares in the UK.
Siegel went further, suggesting that earnings for many companies will beat expectations next year. He said: “I actually think that we’re going to have a boom next year.” And he said in a world of low interest rates, as we have now, “you can’t beat stocks as an asset.”
Why shares are my top asset pick right now
Indeed, it’s hard for me to disagree. Cash and bonds are offering investors pitiful returns right now whereas many shares have attractive dividend yields. On top of that shareholder income from dividends, shares have the potential to deliver capital growth because of operational progress in the underlying business.
And shares can also be a good way to keep ahead of the ravages of general price inflation. Indeed, if I pick the right stocks, the businesses behind them will have the ability to raise selling prices when inflation hits, thus preserving the real value of their profits. And, as the profit number rises, the share price will likely adjust upwards to compensate.
I’d go for big defensive businesses such as energy supplier SSE, pharmaceutical giant GlaxoSmithKline and water utility operator Severn Trent. I’m also keen on giant fast-moving consumer goods companies such as Unilever and Reckitt Benckiser. On top of that, I like the turnaround situations unfolding in smaller defensive outfits such as PZ Cussons and Premier Foods.