After a brutal 12 months in 2022, the S&P 500 rose over 6% in January—to the shock of many Wall Avenue analysts. However Wharton Professor Jeremy Siegel warned on Monday that the great occasions might not final.
After the Federal Reserve raised rates of interest seven occasions to battle the rise of inflation final 12 months, Siegel mentioned that traders are betting that their ways have workWharton Professor Jeremy Siegel warns the Dow might drop 1,000 factors ‘instantly’ if the Fed goes too massive with its subsequent fee hike, inflation has peaked, and fee hikes will sluggish and even cease within the coming months, main the inventory market to rise.
Economists and traders are optimistic, and count on the Fed to lift charges by simply 25 foundation factors (bps) on Wednesday after the most recent Federal Open Market Committee (FOMC)—the place a bunch of officers meets eight occasions a 12 months to resolve rate of interest coverage—concludes. However Siegel warned that if chairman Powell choses to lift rates of interest by 50 foundation factors as an alternative, as he did in December, it may very well be a catastrophe for traders.
“There might be super promoting stress for the danger markets, and we might simply see a 1,000-point drop within the Dow instantly,” he wrote in weekly market commentary, including that even a 25 foundation level fee hike doesn’t imply shares are “all clear.”
Siegel mentioned he might be fastidiously watching Chair Powell’s post-FOMC press convention tomorrow, the place Powell delivered hawkish remarks that despatched markets decrease previously. And he added that even with a 25 foundation level hike, Powell’s tone might be essential.
“Does Powell concede there was a lot progress on the battle over inflation or will he preserve a cussed view that tightening should proceed for for much longer. The markets clearly need this to be the tip or very close to the tip of the tightening cycle….however is Powell paying consideration?”
Siegel has argued for months now that Fed officers are being overly aggressive of their inflation-fight as a result of they’re counting on previous information. In December, he mentioned that inflation is “principally over” and Fed officers are “making a horrible mistake” by persevering with to lift rates of interest.
The professor factors to information that exhibits lease and residential costs are falling, regardless of the supposed housing market inflation seen within the Fed’s inflation gauges. He additionally mentioned on Wednesday that general shopper demand is now “fairly weak,” and financial progress is fading.
However Siegel wasn’t all doom and gloom. He struck a extra constructive tone when discussing the most recent earnings season this week.
“As fourth quarter earnings proceed to return in, they’re largely displaying okay outcomes, with a nod in direction of guiding decrease for 2023,” he wrote. “I nonetheless maintain out hope that productiveness progress can rebound and assist company earnings.”
Siegel mentioned 2023 earnings estimates from Wall Avenue are “conservative” and that companies will do away with “unproductive employees” to assist preserve profitability. Which means, so long as the Fed doesn’t push the financial system right into a recession with aggressive fee hikes, shares might rise.
“We will have a constructive backdrop for the markets,” he wrote. “However we’re reliant on the Fed pivot. All eyes are on you, Powell.”
Jeffrey Roach, chief economist for LPL Monetary, instructed Fortune that he believes the excellent news is that the Fed will finally be compelled to handle either side of its twin mandate—inflation and employment—by pausing fee hikes “as inflation convincingly decelerates.”
“The Fed can not ignore the truth that the financial system is slowing and recession dangers are rising,” he mentioned.
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