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The market is "one other dangerous inflation report" away from correction, warns Wharton's Jeremy Siegel

Long-term market bull Jeremy Siegel is expecting a serious pullback that is not tied to the Covid-19 jump risks.

His turning point: a drastic change in Federal Reserve policy to cope with hot inflation.

"If the Fed suddenly gets tougher, I'm not sure the market is ready for a U-turn that [Chairman] Jerome Powell could take if we still have a bad inflation report," the Wharton finance professor told CNBC " Trading Nation "on Friday. "A correction will come."

The consumer price index rose 6.2% in October, the Labor Department reported earlier this month. It was the biggest win in over 30 years.

Siegel criticizes that the Fed has lagged far behind the curve on anti-inflation measures.

"Since the Fed has not taken any aggressive steps at all, the money is generally still flowing into the market," Siegel said. "The Fed continues to implement quantitative easing measures."

He speculates that the moment of truth will come at the Fed's December 14-15 policy meeting.

If it signals a more aggressive approach to contain rising prices, Siegel warns that a correction could occur.

& # 39; There is no alternative & # 39;

Despite his concerns, Siegel is on stocks.

"I'm still pretty fully invested because there is no alternative," he said. "Bonds are getting worse and worse in my opinion. Cash disappears when the rate of inflation is over 6%, and I think it will rise."

Siegel assumes that rising prices will drag on for several years, with cumulative inflation reaching 20 to 25%.

"Even with stocks that are a little bumpy, you have to want to hold real assets in this scenario. And stocks are real assets." he noticed. "Everything that has long-term value."

But it depends on the company.

He notes that the inflationary backdrop would create headwinds for tech high flyers on the Nasdaq, which hit a record high for the first time on Friday, surpassing 16,000.

"When interest rates rise, the very high-priced stocks that are discounting cash flows well into the future … [are] affected by the discounting mechanism," he added.

Siegel attributes the record strength of growth stocks to fear of delta variants and falling Treasury yields. He predicts that the rise in Covid-19 will subside as more people get boosters.

"That stopped the so-called reopening trade," he said. "The value has become very cheap."

If Siegel is right about an abrupt change in policy by the Fed, he will see that Wall Street got out of the shock pretty quickly and has a new desire to own dividend stocks and financials in 2022.

"[Financials] have been selling at the lower rates lately," Siegel said. "You could come back."

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