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Jeremy Siegel: Christmas Is Coming Early for the Stock Market

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Prof. Jeremy Siegel has a rosy forecast for 2021. (Photo: Lila Photo for TD Ameritrade Institutional)

A Joe Biden presidency and the Republicans holding the Senate is “early Christmas” for the stock market; and the prospect of distribution of Pfizer’s COVID-19 vaccine starting by year’s end augurs that by mid-2021, “the virus is totally gone.”

That’s the rosy outlook from Wharton finance professor Jeremy Siegel in an interview with ThinkAdvisor.

He argues that — after the vaccine receives emergency approval from the Food and Drug Administration — the vaccine, and others undergoing tests by four additional companies, will trigger businesses to reopen next year. And the “enormous liquidity” provided by the Federal Reserve and CARES Act will function like “kindling wood” to fire up a “tremendous increase in economic activity,” he forecasts.

The University of Pennsylvania securities expert and senior investment strategy advisor at WisdomTree wrote “Stocks for the Long Run” (5th edition – 2014), which The Washington Post named “one of the 10 best investment books of all time.”

In the interview, Siegel offered his forecast for the economy and stock market, the latter to possibly see a correction in the technology sector.

ThinkAdvisor interviewed Siegel on Monday. He was speaking by phone from Philadelphia. The otherwise upbeat discussion was also clouded by his forecast for “relatively high” unemployment next year. To remedy that, he cited a need for companies to hire workers who were laid off amid the pandemic and to retrain them.

Here are highlights of our conversation:

How will President-elect Joe Biden’s presidency impact the stock market?

Biden’s winning the presidency and the Republicans holding the Senate is the best thing possible — an early Christmas for the stock market. It’s an excellent combination to block the tax increases [Biden proposed]. If the Democrats do get those two Senate seats in Georgia, [any tax increases] will be muted because conservative Democrats won’t go for some of the more extreme measures.

What approach will Biden take in working with the Senate?

We’re going to go back to an environment of horse trading, where he’ll say [for instance], “I want a light jump in certain tax categories, so I’ll give you guys [something in exchange].” [That is], things will get done through more traditional ways [again]. Maybe some tax rates could jump a little higher on some of the high end, with a bit of a rise in the corporate tax rate [too], but it’s going to be a trade [-off] type of deal.

What about the critical issue of trade — regarding China, in particular?

I think we’ll have a more rational policy toward China — not all those tariffs. I liked Trump’s tax cuts and deregulation; but a lot of his stuff on trade wasn’t good. I don’t think Biden will pursue [that].

Does President Trump’s threat of legal action for what he calls election fraud stand up?

It will fizzle out. There won’t be any significance to it.

What does Pfizer’s COVID-19 vaccine mean to the stock market?

Obviously, it’s good for the economy and stock market because it [will] push the reopening of the economy forward — and that’s very positive for economic growth. Businesses will start opening up in January; and by the middle of next year, I think the virus is totally gone.

What else do you know about the vaccine?

It isn’t just a vaccine against COVID-19. That’s important enough, but it can also be used rapidly for many different types of diseases. So it’s really a very important medical breakthrough.

We’re now in what’s called the third wave of the pandemic. Your thoughts?

Actually, COVID is one wave. We’re having a bit of an increase everywhere; but this is the last of the wave, I think. It will peak around Thanksgiving and early Christmas[time]. So people have to be really careful. But then, that’s it.

Why do you think so?

As the vaccine starts to be distributed, [the number of cases] will go down. You’ll have a total crash in cases in the first quarter of next year; and then basically, there won’t be any increase, just minimal in comparison.

Some people say they don’t trust a vaccine. Isn’t that a big stumbling block?

With its being 90% effective [as Pfizer reported], you don’t need to have everyone inoculated. Once people start getting the vaccine and everyone sees the numbers aren’t going up and that Biden is leading a campaign [for vaccination], [they] will get it too.

What else supports your positive outlook for the economy?

Other companies will be coming out with vaccines, probably by the end of the first quarter of next year. I expect they’ll be just as successful [as Pfizer’s]. Four vaccines of different types will be available.

You stated in July that you knew you’d be able to get a dose of the Pfizer vaccine before year’s end. On what did you base that?

People thought I was crazy. But I knew what the progress was, what the science was, the speed that trials were being done.

I assume you want to get it yourself?

Definitely. I’m in the older age group [75 on Saturday] and have had some medical issues that might put me near the top of the list to have the vaccine at the end of December, which is when it will be available for front-line medical workers, higher-risk people and those in nursing homes. Then it will, sort of, roll out.

What’s your short-term outlook for the economy?

The liquidity that’s been provided by the Fed is enormous, [together with] the CARES Act, which provided so much money. The increase in money supply has been so dramatic that the liquidity is just like kindling wood in the system. As soon as business opens up next year — people starting to travel again, go to restaurants and live events — there’s going to be a tremendous increase in economic activity.

What’s your forecast for the stock market?

We’ll see a rotation in 2021 toward the value stocks away from growth because tech stocks are so expensive and people are going to seek income and look to dividend-paying stocks going forward.

Many in the industry have been saying the market is due for a big correction. What’s the biggest threat?

I don’t see any really big threat to the market now [except] if the Democrats take over the Senate, that would be a big negative. I do think that a number of tech stocks are overblown. there might be a correction in some tech, but it could be offset with a surge in the stocks that have lagged because of COVID.

Your thoughts about bonds?

I’m very bearish on bonds, especially government bonds. They’ll be the ones that will do the worst. I don’t think that in your lifetime, we’ll ever see interest rates as low as we did this year. Bonds are going to have capital losses. People should move to stocks.

Will unemployment drop much in 2021?

I see the unemployment rate remaining relatively high. It will go down next year but not to where it was before COVID. It could take years. A lot of people who were laid off aren’t going to be rehired next year. They’ll have to be retrained or else they’ll drop out of the labor force. This was an opportunity to get rid of everyone the firms thought weren’t productive or weren’t needed in a new economy. It’s going to take a while to retrain them; so the unemployment rate could stay high for a while.

Does retraining require starting college or returning to college?

Not necessarily. A college education is overhyped in terms of its importance. You need training that industries are going to be offering, training that leads right to the jobs that [companies] need filled — not the training that’s typical of most universities.

How will people survive economically while waiting to be retrained?

There’s going to be extended unemployment compensation. They’ll survive. There will be jobs. There are lots of jobs if you’re skilled.

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