Going by the S&P 500’s rally thus far in January, it appears that Wharton Professor Jeremy Siegel’s prediction that the first half of the year might be a lot better than many people thought could prove accurate.
Siegel explained the premise behind his prediction in his appearance on CNBCOvertime.
What Happened: “I saw so many people bearish, and I think as I mentioned when everyone is on one side of the market, the market is going to do the opposite,” Siegel said. So much bearishness is built in that any “crumb of good news” such as the inflation news is interpreted positively by the market, he added.
The hope of a pivot by the Fed at this week's Jan. 31-Feb. 1 meeting, is critically important, the professor said. “We have to get no more than 25 basis points, 50 would be, I think, a disaster,” he said.
Not only should the Fed settle for a 25-basis point hike, but it also needs to send the message that it sees that its policy is working and that it is very near the end of its tightening, the economist said.
If the central bank makes that statement that “we have work to do,” the market may not react very well, he added.
Siegel also pointed to the money supply data – a measure he looks at closely, which in 2022 saw the slowest growth since the great depression of the 1930s. “We have the greatest inversion of the treasury yield curve in over 40 years - the most reliable single indicator of a recession,” he said.
He questioned why the Fed would want to increase the inversion of the yield curve.
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Fed Rate Cut – Precursor To Market Rally: Siegel also said earnings this year are expected to come in lower than last year. "It’s not that we are coming out of peak earnings into a recession," he said.
“If worse comes to worst, we have a recession, I’m going to tell you, there’s no way that stocks are going to make it,” he warned. He doesn’t see the S&P 500 Index progressing from the 4,000 to 4,100 level if the Fed doesn’t begin lowering interest rates, he added.
Incidentally, the academician has called for a 15-20% rally for the S&P 500 Index this year, with the bulk of it potentially in the first half. This would mean the index could rebound to 4,415-4,607.
Siegel is of the view the Fed will cut rates in the second half of the year, and seeing the slowdown in the economy, they are going to pronounce that inflation is over. With that being the case, he said the fed funds rate should be reduced to 2-1/2%.
Siegel also reiterated his view that the central bank should not look at the year-over-year inflation, which has 11 months of older data. If the new data is considered, inflation is very close to the target, and if real housing data is used it is below the target, he said.
“At that particular point, if the economy softens and if we see any sort of easing of that market, why wouldn’t the Fed start moving back,” he added.
Read next: Wharton's Jeremy Siegel Says There's A Chance To Avoid A Recession If This Happens: 'Inflation On Forward-looking Basis Is Very Low'
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