Jeremy Siegel, a finance professor at Wharton School, said on Thursday that he expects the stock market rally to continue this year at least. However, he told CNBC investors will have to be cautious if the Federal Reserve adjusts its highly accommodative monetary policy.
“Only when the Fed is leaning really hard should you worry. I mean, we can let the market go up 30% or 40% before falling that 20%” after a change of course from the Fed, Siegel said on “Halftime Report. ” We’re not in the 9th inning here. We’re more like in the 3rd inning of the boom. “
Siegel said he expects to see a vibrant economy this year as the latest Covid-era economic restrictions are lifted and vaccinations allow it to resume travel and other activities. That will likely unleash inflationary pressures, he said.
“I think interest rates and inflation will rise well above what the Fed has forecast. We will have a strong inflationary year. I think 4% to 5%,” said the old market bull.
Such economic conditions will force the central bank to act sooner than it currently expects, Siegel argued. ‘But in the meantime, enjoy this ride. He’s going to continue … towards the end of the year. ‘
US stocks were higher around noon on Thursday, with the Nasdaqs up about 1% the real star. The tech-heavy index fell on Wednesday but remained about 2.9% from the record that closed in February. The S&P 500 contributed to Wednesday’s all-time high. The Dow Jones Industrial Average was higher, but still close to Monday’s record low.
The yield on 10-year Treasury bills, still below 1.7% on Thursday, has been fairly stable recently. The rapid spike in market interest rates in 2021, including a string of 14-month highs in late March, put growth stocks, many of them technical names, under pressure as higher borrowing costs erode the value of future earnings and put pressure on valuations.
The bond market has been at odds with the Fed this year as traders are pushing up interest rates in the belief that stronger economic growth and inflation will force central bankers to raise short-term interest rates close to zero and complete massive asset purchases earlier than forecast build.
At its March meeting, the Fed raised its growth expectations sharply, but indicated that it is likely that interest rates will not rise until 2023, despite an improving outlook and a reversal to higher inflation this year.
Fed Chairman Jerome Powell reiterated the central bank’s policy stance on Thursday, saying at an International Monetary Fund seminar that asset purchases would “continue at the current pace until we make substantial further progress toward our goals.”
“We’re not looking at predictions for this goal. We’re looking at actual progress toward our goals so we can measure that,” Powell said at the event led by CNBC’s Sara Eisen.
So far, Powell added, the economic recovery has been “uneven and incomplete,” with lower-income US residents seeing less employment growth.
Responding to the IMF’s comments from Powell, Siegel said, “I’ve never heard a Fed chairman so subdued.”
Why stocks are still attractive
One of the main reasons stocks could still rise despite a rebound in inflation is because owning stocks would still be better than bonds or holding cash, Siegel said.
“People will turn around and say, ‘Okay, so there is more inflation and the ten-year period is rising? What am I going to do with my money? Does that mean I don’t want to be in the stock market anymore? [corporations] have more pricing power than they likely have in two decades or more? Siegel said. “No not yet.”
At one point, Siegel said the calculus will change for investors.
“Ultimately, 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 going on in 2021. “