The stock market is poised for a significant year-end rally because 'inflation is basically over', Wharton professor Jeremy Siegel says
Jeremy Siegel said "inflation is basically over" on Thursday after October's CPI report showed lower-than-expected inflation.
Siegel said investors should expect a significant year-end rally in the stock market as investors recalibrate their Fed expectations.
"There's still a chance we can avoid a hard landing if the Fed pivots in December," Siegel said.
Wharton professor Jeremy Siegel is encouraged by the October CPI report, which showed lower-than-expected inflation and sent the stock market soaring on Thursday.
In an interview with CNBC, Siegel said "inflation is basically over and the Fed doesn't have to get anywhere near as high [on interest rates]."
Siegel's confidence stems from the fact that when you exclude the Fed's use of lagging housing data, inflation would actually be negative. The CPI report showed prices rising 7.7% year-over-year, and up 0.4% on a monthly basis. That's better than expectations for 7.9% and 0.6%, respectively.
"We're in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they've been using," Siegel said. The professor has long been critical of the Fed's use of lagging housing data, as current price data shows an ongoing decline in both home and rent prices.
So when should the Fed pivot away from its aggressive interest rate hikes? According to Siegel, "yesterday."
"The danger is the Fed is getting to tight, and now I think the data is showing: yeah, maybe that's true," Siegel said, adding that the Fed is likely to hike rates by 50 basis points in December and then announce a pause in future rate hikes. Siegel doesn't think they need to interest rates in December, and should instead pause rate hikes now.
And if the Fed does follow Siegel's preferred path for future monetary policy decisions, they would have a good chance at avoiding a hard economic landing.
"There's still a chance we can avoid a hard landing if the Fed pivots in December. 2023 won't be as bad as many think," Siegel said.
Next month's Fed meeting coincides with the release of the November CPI report, and if that shows an extension of the decline seen in October, it could lead the Fed to hike rates by only 25 basis points, Siegel said. That would be viewed as a positive by investors, as just a few weeks ago most were expecting a 75 basis point rate hike next month.
Fed chair Jerome Powell "is going to change his tune when they get to the real world data in their December meeting. I think this does make for a good year-end rally," Siegel said.
But just because stocks may rise into year-end doesn't mean investors should load up in tech stocks. Instead, Siegel is more bullish on value-oriented and dividend-paying stocks, and recommends investors own both value and growth in a balanced portfolio.
"Both will be going up... hold a balanced portfolio," Siegel said.
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