Jeremy Siegel: Bear Market will End

"Wizard of Wharton" says stocks will rebound eventually.

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Late one recent afternoon, University of Pennsylvania finance Prof. Jeremy Siegel agreed to offer advice to investors worried about the slumping stock market. The Dow was trending down and headed for another volatile close, but as the conversation neared its end, the market began to nose-dive. With just 13 minutes left to trade, it looked, Siegel said, like a "huge dumping of stock. This might be the panic sell-off. This could be the 1,000-point day."

He was mostly correct. At the close on October 9, the Dow was down 679 points. The next day, it tacked on an eighth straight day of losses. Watching the drop obviously concerned the "Wizard of Wharton," but even as blood flowed on the stock exchange floor, Siegel was steadfast in his predictions that the markets would live to see another day and, eventually, flourish.

"I think these prices will be viewed as extremely cheap even a year from now. People will wish they'd had the guts to go in," he said. "We've come back from every bear market and moved on to new highs. Those people with a long horizon should look at this as an excellent opportunity to accumulate stocks."

Bounce-back scenario. While Siegel wasn't about to predict an exact bottom in the market, when the recovery comes (and he's absolutely sure it will), Siegel says it will probably follow this pattern: Stocks bounce back quickly 10 to 15 percent from the lows and then usually waver for three to six months, sometimes testing previous lows before finding their footing.

He sees no reason why this time will be any different. "I don't see why we can't bounce back from this market. The losses have been taken in real estate. There's nothing intrinsic in the world economy that has lost its productivity," he says.

So far, so good. Maybe the Dow's nearly 1,000-point pop on October 13 was a sign that Siegel's scenario is coming true. But beyond that, the notion that falling stocks come as some sort of penance for an economy built on indebtedness looks overblown, he says. Economic strength has endured during the turmoil, and even though a recession is probably inevitable, he believes that the United States is likely to avoid a repeat of the worst economic times. Siegel doesn't expect another 1982, when unemployment, currently 6.1 percent, jumped to almost 11 percent—or even the 7.8 percent jobless rate seen in 1991-92, the last time real estate shook the economy.

With that in mind, Siegel has no doubt that what went down will go back up, including the battered banking sector. Despite the pariah status accorded financials during this crisis, the survivors—JPMorgan Chase, Citigroup, Wells Fargo—will all do well once the shakeout is finished, he says. Making calls like that takes conviction in a beaten-down market, especially during Wall Street's worst week in years.

So, take heart, investors: One of the financial world's keenest minds has an unshakable faith that brighter days are ahead for Wall Street.