Jeremy Siegel, professor of finance at the Wharton School, said Thursday that he expects the stock market rally to persist at least through this year. However, he told CNBC that investors will need to be cautious once the Federal Reserve adjusts its very accommodative monetary policies.
“It’s only when the Fed leans really hard that you have to worry. I mean, we could take the market up 30% or 40% before it goes down 20%” following a change in Fed cap, Siegel said on “Halftime Report.” “We’re not in the ninth inning here. We’re more in the third inning of the boom.”
Siegel said he expects to see a roaring economy this year as the last Covid-era economic restrictions are lifted and vaccinations allow travel and other activities to resume. This risks triggering inflationary pressures, however, he said.
“I think interest rates and inflation are going to rise well above what the Fed has expected. We’re going to have a strong inflationary year. I think 4% to 5%,” the bull long time.
Economic conditions of this nature will force the central bank to act sooner than it currently expects, Siegel argued. “But in the meantime, enjoy this ride. It will continue…towards the end of the year.”
US stocks were higher around midday Thursday, with the Nasdaq’s roughly 1% advance the real star. The tech-focused index fell on Wednesday but remained around 2.9% off its record close in February. The S&P 500 added to Wednesday’s record result. The Dow Jones Industrial Average was higher but still below Monday’s closing record.
The 10-year Treasury yield, still below 1.7% on Thursday, has been pretty flat lately. The rapid surge in market rates in 2021, including a series of 14-month highs in late March, has sent growth stocks, many of them tech names, tumbling as higher borrowing costs erode the value of earnings futures and squeeze valuations.
The bond market has been at odds with the Fed this year, as traders push yields higher on the belief that stronger economic growth and inflation will force central bankers to raise short-term interest rates to levels close to zero and to reduce massive asset purchases sooner than expected.
At its March meeting, the Fed sharply raised its growth expectations, but signaled the likelihood of no rate hike through 2023 despite an improving outlook and a shift this year to higher inflation.
Fed Chairman Jerome Powell reiterated the central bank’s policy stance on Thursday, telling an International Monetary Fund seminar that asset purchases “would continue at the current pace until we make further progress.” towards our goals”.
“We don’t look at forecasts for that purpose. We look at actual progress toward our goals so we can measure that,” Powell said during the event hosted by CNBC’s Sara Eisen.
So far, Powell added, the economic recovery has been “uneven and incomplete,” with lower-income U.S. residents seeing fewer job gains.
Responding to Powell’s remarks about the IMF, Siegel said, “I’ve never heard such a dovish Fed chairman.”
Why stocks are still attractive
One of the main reasons stocks can still rebound despite a pick-up in inflation is that holding stocks would still be better than holding bonds or holding cash, Siegel said.
“People are going to turn around and say, ‘OK, there’s more inflation and the 10-year is going up? What am I going to do with my money? [corporations] have more pricing power than they probably have had in two decades or more? “Said Siegel. “No, not yet.”
At some point, Siegel said investors’ calculus would change.
“At the end of the day, the Fed will just have to step in and say, ‘Wow. We just have a little too much inflation. Now is the time to be careful,” Siegel said. “I wouldn’t be really careful right now. I still think the bull market is on for 2021.”
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