The market is a bad report on inflation far from the correction: Jeremy Siegel
Long-term market bull Jeremy Siegel expects a serious pullback that is unrelated to the risks of a Covid-19 surge.
Its tipping point: a drastic change in Federal Reserve policy to deal with hot inflation.
“If the Fed suddenly hardens, I’m not sure the market is ready for a turnaround that [chair] Jerome Powell could take if we have another bad report on inflation, “the Wharton finance professor told CNBC’s” Trading Nation “Friday.” A correction will come. “
The consumer price index jumped 6.2% in October, the Labor Department reported earlier this month. This is the biggest gain in over 30 years.
Siegel criticizes the Fed for being way behind the curve in terms of anti-inflationary measures.
âUsually, since the Fed has not taken any aggressive action, the money continues to flow into the market,â Siegel said. “The Fed is still doing quantitative easing.”
He speculates that the moment of truth will come at the Fed’s December 14-15 policy meeting.
If this signals a more aggressive approach to containing the price increase, Siegel warns that a correction could strike.
“There is no alternative”
Despite his concern, Siegel is in stock.
âI’m still pretty invested because, you know, there is no alternative,â he said. “Bonds are, in my opinion, getting worse and worse. Liquidity disappears at an inflation rate above 6%, and I think it goes higher.”
Siegel predicts that the price hike will extend over several years, with cumulative inflation reaching 20-25%.
âEven with a bit of a bump in stocks, you have to want to own real assets in this scenario. And, stocks are real assets,â he noted. âAnything that will hold its value in the long run. “
But it depends on the company.
He notes that the backdrop of inflation would create headwinds for high-flyers from the Nasdaq, which hit record highs and crossed 16,000 for the first time on Friday.
“If interest rates go up, the very high priced stocks that discount the cash flow in the future … [are] is going to be affected because of the discount mechanism, âhe added.
Siegel attributes the record strength of growth stocks to fears of the Delta variant and declining Treasury yields. He predicts that the Covid-19 outbreak will subside as more people receive reminders.
“It stopped the so-called reopening of trade,” he said. “The value has gotten very cheap.”
If Siegel is right about a sharp change in Fed policy, he sees Wall Street weathering the shock fairly quickly and a new desire to own dividend-paying stocks and financials in 2022.
“[Financials] have sold recently with lower interest rates, “Siegel said.” They might come back. “