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The market is unprepared for the results of inflation, warns Wharton's Jeremy Siegel

Wall Street may be on the edge of an unusually painful quarter.

Wharton finance professor Jeremy Siegel, known for his positive market forecasts, is sounding the alarm about the market's ability to inflate.

"We are heading for some difficulties," he told CNBC's "Trading Nation" on Friday. "Inflation in general is going to be a much bigger problem than the Fed thinks."

Siegel warns that there are serious risks associated with rising prices.

"The Fed will put pressure on to speed up its tapering process," he said. "I don't think the market is ready for an accelerated taper."

Its cautious move marks a clear departure from its early January bull market. On January 4th at Trading Nation, he correctly predicted that the Dow would hit 35,000 in 2021, up 14% from the first opening of the year. The index hit an all-time high of 35,631.19 on August 16. On Friday it closed at 34,326.46.

According to Siegel, the biggest threat to Wall Street is that Federal Reserve Chairman Jerome Powell will step back from easy money policies much sooner than expected due to rising inflation.

“We all know that a lot of the ease of the stock market is related to the liquidity that the Fed has provided. If this is reduced faster it also means rate hikes will come sooner, ”he noted. "Neither thing is positive for the stock market."

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Siegel is particularly concerned about the impact on growth stocks, especially technology. He suggests that tech-heavy Nasdaq, which is 5% off its all-time high, is poised for heavy losses.

"There will be a challenge for the long-term stocks," Siegel said. "The bias will be toward value stocks."

He sees the background as good for companies that benefit from rising interest rates, have pricing power, and deliver dividends.

"The yield is tight and you don't want to be tied to long-term government bonds, which I think will suffer dramatically over the next six months," he said.

The inflationary environment, Siegel said, could cause utilities and consumer staples, known for their dividends, to underperform for a strong run.

"They can finally have their day in the sun," said Siegel. "When you have a dividend, companies can raise their prices and historically dividends are protected against inflation. Obviously, they are not as stable as a government bond. But they have this inflation protection and a positive return."

Siegel is also optimistic about gold. He believes it has become relatively cheap as an inflation hedge and cites Bitcoin's popularity as the reason.

"They are turning to Bitcoin and I think they are ignoring gold"

"I remember inflation in the '70s. Everyone turned to gold. They turned to collectibles. They turned to precious metals," he said. "Today in our digital world they are turning to bitcoin and I think they are ignoring gold."

He is also not deterred by the rise in real estate prices.

"I don't think it's a bubble," said Siegel. "Investors foresaw some of that inflation … Mortgage rates are going to have to go up a lot more to really damage real estate. So I think real estate [and] REITs are still good assets to own."

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