Jeremy Siegel to Long-Term Investors: Buy Stocks Now

Wharton School economist Jeremy Siegel considers stocks “the asset of choice” and suggested the Fed may not raise the benchmark interest rate as aggressively as its leaders have indicated.

The finance professor, appearing Sept. 1 on CNBC’s Closing Bell, noted that 26 of 27 inflation indicators, including consumer and producer prices, had come in below expectations over the previous 30 days.

The professor reiterated his view that the Fed, which is seeking to rein in high inflation, needs to raise interest rates by only 100 basis points for the rest of this year.

The stock market is worried about Fed tightening and if the central bank doesn’t raise rates as aggressively as people think, it would be “obviously very favorable for the stock market,” he said.

“The stock market is pretty smart. And they’re looking on the ground and they see moderation and they would love at least for (Federal Reserve Chairman Jerome) Powell to acknowledge that there is moderation on the ground prices and that they will be looking at those rather than saying we’re going to stamp out until we see inflation move down,” Siegel said.

Powell should tell the market what inflation indicators he’s watching, the economist said. “The indicators I’m looking at, inflation is moving down,” he added, noting that official statistics won’t reflect certain trends right away.

Stocks Are Cheap

Siegel, noting equities are trading around 18 times forward-looking earnings, sees stocks as attractively priced, especially for long-term investors. (The S&P 500 index was trading at a 17.5 forward price-to-earnings ratio Friday, per The Wall Street Journal.)

Even if downward earnings give stocks a 19 P/E ratio, ”in a world where interest rates are still barely inflation, I still think that stocks are definitely the asset of choice, and for long-term investors this is certainly the time to accumulate,” he said.

“Short-term, clearly I think June was the (market) bottom. We might test that bottom, I think it is. Long-term investors, these are good prices for equities,” Siegel said. Stocks are real assets and over time their returns surpass inflation, he added in a televised conversation about investment choices in the current environment. Stock buybacks combined with dividend yields help produce returns that outpace the Treasury yield, he said.

Fed Predictions

Siegel said he was “shocked” late last month when Powell, in a speech at Jackson Hole, Wyoming, acted “like things are just getting worse and worse” with inflation and that the central bank must stay the course on raising interest rates. While the Fed won’t likely pivot to easing rates anytime soon, Siegel suggested they may moderate sooner than expected.

“When the Fed starts looking at the data over the next two or three months, they’re going to see a moderation, and just like they changed from what they had planned a year ago, they will change. And they will see what I think the market is seeing. The market wants him to be able to see that,” rather than the pendulum swinging from the Fed being too easy to too tight, he added.

“Of course he cannot back off and now say we’re ready to moderate right now, but I want the flexibility and looking on the ground because I see a lot of favorable factors out there on the inflation front,” Siegel said.

He noted that a year ago, half of the Federal Open Market Committee, the Fed’s policymaking body, said there would be no need to raise interest rates in 2022, and the most hawkish members anticipated the possibility the Fed would raise rates by 50 basis points this year.

The central bank has raised rates aggressively this year, a total of 225 basis points so far, most recently with 75-basis-point increases in June and July.

 “So do they really have the ability to see the future? Not really,” the professor said.

“I think they should do another 100 basis points by the end of the year, the market expects a bit more, but that does fulfill a good tightening. I don’t think they need to go higher than that, and scaring the market, saying we’re going to stay high through 2023 when they have no idea what’s going to be happening in 2023, was not really a good image to project,” Siegel said.

When the economy has 26 out of 27 inflation indicators come in below expectations in the last 30 days, “that’s telling you that you’ve got a hold of this problem, belatedly.”