Lengthy-term market bull Jeremy Siegel expects a severe pullback that it is not tied to the Covid-19 surge dangers.
His tipping level: a drastic change in Federal Reserve coverage to be able to take care of scorching inflation.
“If the Fed suddenly gets tougher, I’m not sure that the market is going to be ready for a U-turn that [chair] Jerome Powell may take if we have one more bad inflation report,” the Wharton finance professor advised CNBC’s “Trading Nation” on Friday. “A correction will come.”
The patron worth index surged 6.2% in October, the Labor Division reported earlier this month. It marked the most important acquire in additional than 30 years.
Siegel criticizes the Fed for being far behind the curve when it comes to taking anti-inflationary motion.
“Generally, since the Fed has not made any aggressive move at all, the money is still flowing into the market,” Siegel mentioned. “The Fed is still doing quantitative easing.”
He speculates the second of fact will occur on the Fed’s Dec. 14 to Dec. 15 coverage assembly.
If it alerts a extra aggressive strategy to comprise rising costs, Siegel warns a correction may strike.
‘There is no different’
Regardless of his concern, Siegel is in shares.
“I am still pretty fully invested because, you know, there is no alternative,” he mentioned. “Bonds are getting, for my part, worse and worse. Cash is disappearing at the rate of inflation which is over 6%, and I think is going higher.”
Siegel anticipates rising prices will stretch out over several years, with cumulative inflation reaching 20% to 25%.
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“Even with a little bit of bumpiness in stocks, you have to be wanting to hold real assets in this scenario. And, stocks are real assets,” he noted. “All that which in the long run is going to maintain value.”
But it depends on the company.
He notes the inflation backdrop would create headwinds for tech high-flyers in the Nasdaq, which is at record highs and crossed 16,000 for the first time ever on Friday.
“If interest rates go up, the very high-priced stocks which discounts cash flows way into the future… [are] going to be affected because of the discounting mechanism,” he added.
Siegel attributes growth stocks’ record strength to Delta variant fears and falling Treasury yields. He predicts the Covid-19 surge will subside as more people get boosters.
“That has stopped the so-called reopening trade,” he said. “Value has gotten very cheap.”
If Siegel is right about an abrupt Fed policy change, he sees Wall Street getting over the shock of it fairly quickly and a new desire to own dividend stocks and financials in 2022.
“[Financials] have been selling off recently with the lower interest rates,” Siegel said. “They could come back.”
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