Wharton Schools economics professor Jeremy Siegel said Thursday that he expects the stock market rally to continue at least throughout this year. However, he told CNBC that investors will have to be careful when the Federal Reserve adjusts its very accommodating monetary policy.
“It’s only before the Fed leans very hard, then you have to worry. I think we could make the market rise 30% or 40% before it goes down by 20%” after a change of course from the Fed, Siegel said on “Halftime Report.”
Siegel said he expects to see a roaring economy this year as the last of the Covid era’s economic restrictions are lifted and vaccinations allow travel and other activities to pick up again. It is likely to release inflationary pressures, he said.
“I think interest rates and inflation will rise well above what the Fed has expected. We’ll have a strong inflation year. I think 4% to 5%,” the longtime market leader said.
Economic conditions of this kind will force the central bank to act faster than it currently expects, Siegel argued. “But in the meantime, enjoy this trip. It continues … towards the end of the year.”
US stocks were higher around noon Thursday, with Nasdaqs about 1% advancing the real standout. The tech-heavy index plunged on Wednesday, but remained about 2.9% away from its close record in February. The S&P 500 added Wednesday’s record high. The Dow Jones Industrial Average was higher, but still below Monday’s record close.
The 10-year government yield, which is still below 1.7% on Thursday, has been fairly stable recently. The rapid rise in market interest rates in 2021, including a run of 14-month highs in late March, knocked growth stocks, many of them technological names, as higher borrowing costs destroy the value of future profits and squeeze valuations.
The bond market has been at odds with the Fed this year as traders push interest rates on the belief that stronger economic growth and inflation will force central bankers to go close to zero short-term interest rates and downsize massive asset purchases faster than expected.
At its March meeting, the Fed sharply raised its expectations for growth, but hinted at the likelihood of no rate hikes through 2023 despite improved prospects and a turnaround this year to higher inflation.
Fed Chairman Jerome Powell on Thursday reiterated the central bank’s political stance, saying at a seminar on the International Monetary Fund that asset purchases “would continue at the current pace until we make significant further progress towards our goals.”
“We are not looking at forecasts for this purpose. We are looking at actual progress towards our goal, so we will be able to measure it,” Powell said during the event moderated 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 employment gains.
In response to Powell’s IMF remarks, Siegel said: “I have never heard a Fed chair so deaf.”
Why stocks are still attractive
One of the main reasons stocks can still rise despite a rise in inflation is that owning stocks would still be better than bonds or having cash, Siegel said.
“People will turn around and say ‘OK, so there’s more inflation and the 10-year-olds are rising? What should I do with my money? Does that mean I will be out of the stock market when [corporations] have more price power than they probably have had for two decades or more? Said Siegel. “No not yet.”
At one point, Siegel said the calculation for investors will change.
“Eventually, the Fed will just have to step in and say, ‘Wow. We just have a little too much inflation.’ It’s time to be careful, “Siegel said.” I would not really be careful right now. I still think the bull market is up and running in 2021. “