Jeremy Siegel (R), professor of finance at the Wharton School, University of Pennsylvania, participates in a panel discussion during the Skybridge Alternatives (SALT) Conference in Las Vegas, Nevada May, 9, 2012. REUTERS/Steve Marcus
• He pointed to falling inflation indicators, meaning one of the biggest risks to the market is the Fed hiking rates too high.
• "I think stocks are undervalued greatly in the long run," he said, despite current volatility. Fears that the Fed will raise rates too high is what's keeping stock prices down, according to Wharton professor Jeremy Siegel, who predicted a big rally next year as policy won't be so tight much longer.
I found this interview compelling as we think about any moves we might want to make after earning reports are complete.
"I'm staying put," he said of his outlook for US stocks in an interview with Bloomberg TV on Friday. "I certainly wouldn't be surprised if a year, year and a half from now we're 20% to 30% higher. I think stocks are undervalued greatly in the long run."
Siegel has flaunted a bullish stance on the market, even as other experts on Wall Street have sounded alarms for a recession and an imminent market crash. That's largely because the Fed has signaled they will continue to hike rates to combat inflation – but that pressure toward the downside could soon ease, as inflation-leading indicators are falling rapidly, Siegel said.
Previously, he pointed to falling housing prices, which make up 40% of the Consumer Price Index and lag behind the official statistics by about 18 months. That means while inflation remain sky-high at 8.2%, inflationary pressures may be much more mild than they appear on the surface, which could bring much-needed buoyancy to the stocks.
Other experts have supported that view, with Fundstrat's Tom Lee predicting the S&P 500 could rally as much as 39% due to falling inflationary pressures in areas like commodity prices and job openings data.
But the biggest risk to that upside is the Fed ignoring those indicators and continuing to hike rates, which could overtighten the economy and tip the US into a recession, or worse, a depression, Siegel warned. The question is will the Fed stubbornly raise interest rates beyond all common sense and economic indicators. I would say no since they read the same data that I do and Dr Siegel does.
Investors showed fears of that outcome last week when the September CPI clocked in above expectations and solidified views that the Fed will enact two more 75-basis-point rate hikes this year, triggering a sell-off in stocks.
"The fear of the Fed overtightening and recession is really what's keeping [stocks] at bay right now," Siegel said.
Currently, the fed funds rate is targeted at 3.00% to 3.25%, and the central bank estimates it will stop hiking once it reaches a peak range of 4.5% to 5%.
"For the long run, I think [US stocks are] marvelous, and for the short run it's rocky. And if you can pick the bottom, all the more power to you," Siegel added. I say good luck to that as most investors underperform because they try to pick the bottom. More on this after earnings season is over in about 4 to 5 weeks.
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