Broker Check

Siegel's views for what will happen to the stock market and economy next year

December 13, 2022

One of the true most respected pundits in the financial markets is Wharton professor, Jeremy Siegel. I have quoted him in the past. He was just interview about the markets and I thought it worthy of your review. Key points:

Wharton professor Jeremy Siegel has been outspoken in his view that the Federal Reserve's outsized interest rate hikes could do lasting damage to the economy as more and more investors grow concerned about a recession. Yet unlike other stock market outlooks, his 2023 forecast is actually bullish and calls for upside of at least 20%. That's because he sees inflation collapsing and a resilient economy that too many investors underestimate.

In an extended interview with CNBC last week, Siegel outlined his views for what will happen to the stock market and economy next year, and why Fed Chairman Jerome Powell could be making a big mistake if he continues to raise interest rates.

Here are the nine best quotes.

1. On why wages are not driving overall inflation:

"We had 5% year-over-year wage growth. We have 8% inflation. Workers are trying to catch up and they're not. They're still falling well behind. It just disturbs me to think that the Fed policy is to crush wages so they go back down to 2%, basically saying to the worker, 'you're not going to catch up to inflation, and we're going to prevent you from catching up to inflation.' That's an insane policy," Siegel said.

"So this idea that the worker trying to catch up because he's lost so much purchasing power is something the Fed has to crush, to me, is extraordinarily bad Fed policy, and I don't think it's inflationary, because it's inflationary when wages jump ahead of prices, not when they lag behind prices."

2. On the Fed's rate decision on Wednesday:

"My feeling is it's 50 [basis points]. The data is going to come in, and they won't even have any [rate hikes] in February. If that does happen, wow that's good for stocks, good for bonds and stocks... You know my feeling is you don't need more than this 50 basis points. This 50 basis points might be too much in and of itself." ( I agree with Professor Siegal and see the Fed holding on further interest rate hikes.)

3. On why Siegel is so critical of the Fed:

"Yes, I'm very critical of the Fed. To be blunt, here's a Fed that caused the inflation by expanding liquidity greater than any other time in history, is basically talking as if, to the worker, 'we're not going to let you catch up to the inflation that I caused.' That's a slap in the face to the American worker, in my opinion. I just don't think that is justified."

4. On where inflation goes from here:

"I still believe [inflation is over]... everything else I see on the price front [is down]... I am not changing my view that inflation is basically over. This is catch-up wages, and the Fed should not be setting policy to go against that... There's tremendous evidence of slowing inflation."

5. On where yields go from here:

"I think [bond yields] are going to keep going down, because I think we're going to have slower growth. This was not a hot [November jobs] report. And we're going to have slowing inflation. Those are two good things for bonds, and they're also good for stocks."

6. On where the federal funds rate goes from here:

"I'm really sticking my neck out here, but I wouldn't be surprised by the end of the next year that we have a handle on the fed funds rate. That's way out of consensus, I know that... But I'm just saying when we get this data in, we're gonna get down very quickly." The effective fed funds rate is currently at 3.8%

7. On when the Fed will begin to cut rates:

"The talk is not going to be is it going to be a 25-basis-point hike or what else. It's going to be when are we going to decrease the rate? That may come as early as the spring." (This is interesting because no one is predicting a rate decrease other than Professor Siegal. He has been doing this for over 50 years. My belief is that most pundits that predict dire circumstances are proven wrong.)

8. On the potential for a recession in 2023:

"Earnings are important, to say the least. If the Fed does stay tight we're going to go into a recession. Earnings aren't going to be $230 [per share for the S&P 500], they're going to be $200, or $190 for a couple of years or a year-and-a-half," Siegel said.

"GDP this year is going to be below 1%... That's not strong. It's not a recession, not yet. But if [the Fed] goes to 6%, you're going to have it."

9. On the potential for economic growth in 2023:

"We have 4.5 million new workers and almost no GDP increase. I think next year we're going to have much lower payroll growth, and much better GDP. Because that record decline in productivity we had this year is going to reverse in 2023... Productivity is going to go up, that improves margins and that's good for profits."

I believe what he said in #9 is the most significant. Fourth quarter earnings will be worse than third quarter and as a result corporations are going to cut cost to get back to profitability. As a result, their productivity will go up. I think that is what is going to propel the stock market in the second half of next year over 20%.  

 "This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."