The market is unprepared for the fallout of inflation: Jeremy Siegel of Wharton

Wall Street could be on the verge of an unusually painful quarter.

Wharton finance professor Jeremy Siegel, known for his positive market forecast, is sounding the alarm bells about the market’s ability to cope with inflation.

“We are heading for future problems,” he told CNBC’s “Trading Nation” on Friday. “Inflation, in general, is going to be a much bigger problem than the Fed realizes.”

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

“There is going to be pressure on the Fed to speed up its reduction process,” he said. “I don’t think the market is prepared for an accelerated decline.”

His cautious change is a clear departure from his early January optimism. On Jan. 4 on Trading Nation, he correctly predicted that the Dow Jones would hit 35,000 in 2021, a 14% jump from the first market 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.

The biggest threat to Wall Street, according to Siegel, is that Federal Reserve Chairman Jerome Powell is stepping away from easy monetary policies much sooner than expected due to soaring inflation.

“We all know that a lot of the lightness in the equity market has to do with the liquidity the Fed has provided. If this is to be removed sooner, it also means that interest rate hikes will happen sooner. “, he noted. . “Those two things are not good for the stock market.”

Siegel is particularly concerned about the impact on growth stocks, especially technology. He suggests that the highly technical Nasdaq, which is 5% off its record, is ready to take big losses.

“There will be a challenge for long-term actions,” Siegel said. “The tilt will be towards value stocks.”

He sees the backdrop as auspicious for companies benefiting from rising rates, having pricing power and offering dividends.

“The yield is scarce and you don’t want to get locked into long-term government bonds which I think are going to suffer quite dramatically over the next six months,” he said.

The inflationary backdrop, Siegel said, could allow utilities and consumer staples, known for their dividends, to perform well.

“They can finally spend their day in the sun,” Siegel said. “If you have a dividend, companies can raise their prices and historically dividends are protected against inflation. They are of course not as stable as a government bond. But they do have that protection against inflation. and a positive return. “

Siegel is also bullish on gold. He believes it has become relatively cheap as an inflation hedge and cites the popularity of bitcoin as the reason.

“They are turning to bitcoin, and I think I ignore gold”

“I remember the inflation in the 1970s. Everyone looked to gold. They turned to collectibles. They turned to precious metals,” he said. declared. “Today in our digital world they are looking to bitcoin, and I think they are ignoring gold.”

He is also not put off by the rise in house prices.

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


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