Long-term market bull Jeremy Siegel expects a serious withdrawal that is not linked to the Covid-19 wave risk.
His tipping point: a drastic change in Federal Reserve policy to deal with high inflation.
“If the Fed suddenly gets tougher, I’m not sure the market is going to be ready for a complete reversal that [chair] “Jerome Powell can take if we have another bad inflation report,” Wharton’s finance professor told CNBC’s “Trading Nation”[ads1]; on Friday. “A correction will come.”
The consumer price index rose by 6.2 per cent in October, the Ministry of Labor reported earlier this month. It marked the biggest gain in more than 30 years.
Siegel criticizes the Fed for being far behind the curve when it comes to taking anti-inflation measures.
“In general, since the Fed has not made any aggressive moves at all, the money is still flowing into the market,” Siegel said. “The Fed continues to make quantitative easing.”
He speculates the moment of truth will happen at the Fed’s political meeting on December 14-15.
If it signals a more aggressive approach to curb rising prices, Siegel warns that a correction may occur.
“There is no alternative”
Despite his concerns, Siegel is in stocks.
“I’m still pretty fully invested because, you know, there’s no alternative,” he said. “Bonds are, in my opinion, getting worse and worse. Cash is disappearing at an inflation rate above 6%, and I think it’s going higher.”
Siegel expects rising prices to extend over several years, with cumulative inflation reaching 20% to 25%.
“Even with a little unevenness in stocks, you must want to have real assets in this scenario. And stocks are real assets.” he remarked. “Everything that in the long run is going to maintain value.”
But it depends on the company.
He notes that the inflation background would create headwinds for technology high-flyers on the Nasdaq, which is at record highs and crossed 16,000 for the first time ever on Friday.
“If interest rates go up, the very expensive stocks that discount cash flows far into the future … [are] will be affected due to the discount mechanism, “he added.
Siegel attributes the record strength of growth stocks to fears of delta variants and falling government interest rates. He predicts that the Covid-19 rise will decrease as more people get boosters.
“It has stopped the so-called reopening trade,” he said. “The value has become very cheap.”
If Siegel is right about an abrupt change in Fed policy, he sees that Wall Street will get over the shock of it fairly quickly and a new desire to own dividend stocks and finance in 2022.
“[Financials] have sold out recently with the lower interest rates, “Siegel said.” They can come back. “