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Jeremy Siegel

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Jeremy Siegel Doesn't See Market Falling Much Further

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What You Need to Know

  • Some FOMC members may sound hawkish at next meeting, but Siegel said he was not concerned.
  • Value-stock prices suggest marketing-beating returns in the long term, Siegel says.
  • Siegel thinks Fed has banking troubles contained.

Wharton School economist Jeremy Siegel expects the Federal Reserve to raise interest rates by 25 basis points when the central bankers meet next week and for Chairman Jerome Powell potentially to signal a pause in further hikes following the Silicon Valley Bank collapse.

“I do think Powell’s going to do a 25 basis-point increase but signal strongly without committing that there will be a pause after that,” Siegel, senior investment strategy advisor at WisdomTree and Wharton emeritus finance professor, said on a WisdomTree webcast Thursday.

He suggested the bank collapse will lead to a chill in lending equivalent to one or two Fed tightening rounds and said he doesn’t expect the stock market to decline much from here.

“I think the Fed has this contained and this is going to knock some sense into Jay Powell’s head,” Siegel said.

Because the Federal Open Market Committee will hold a quarterly meeting on March 22, members will make their “dot plot” projections for the Fed’s benchmark interest rate, he said, cautioning that many FOMC members “are going to be more aggressive than what the market thinks” when the panel meets and holds a press conference Wednesday.

That hawkishness will scare the market, Siegel predicted, downplaying the significance of those data-dependent projections. “All those projections are on tissue paper and don’t mean very much at all,” he said.

The market might see a little sell-off at 2 p.m. Wednesday, followed by a possible rally at 2:30 when Powell speaks, Siegel said.

The collapsed Silicon Valley Bank “violated Banking 101, Week Two, which is never borrow short and lend long,” Siegel said, as that position puts an institution in trouble if short-term rates climb higher than long-term rates. He said it was beyond his imagination that the bank put deposits into Treasury bonds with 10- and 20-year durations.

Had SVB put those deposits in 90-day T-bills and just rolled them over, “there would be no story whatsoever, there would be no crisis, there would be no run … it was a gross mistake by management,” Siegel said.

“They should have gone to the Fed immediately when they saw a shortfall” and established a line of credit with Fed, or made a similar move to troubled First Republic, which has received a big cash infusion from other banks, he said.

“It is quite mind-boggling to me,” Siegel said.

Bank Collapse Will Chill Lending

“Clearly this puts a chill in lending everywhere. Some experts say that the chill in lending …  it’s a chill equivalent probably to one or two tightenings of the Fed and that’s why the Fed has to go low,” the economist said. The Fed is aware of this, he added.

“I don’t think they’re going to go zero,” Siegel predicted. Forward guidance is more important than whether the Fed goes to zero or a 25 basis-point hike now, as the central bank wants to say it’s continuing the fight against inflation, he added.

Siegel said he sees a recession as more likely now but thinks it will be mild. As for the SVB shock, the Fed needed to see that its tightening was among the worst in its history and that they went too far, Siegel said.

“In some sense this is good news,” he said, adding he is more optimistic longer term even though the shock’s chilling effect may result in lower gross domestic product and earnings in 2023.

Siegel considers the SVB collapse “a volatility event that is going to be well controlled, that has been well controlled.” It’s not like 2008, when banks had made bad loans, he added. “These banks have been stress-tested for bad loans,” he said.

If the Fed starts lowering rates later this year, which he thinks it should, bank loan and deposit growth should return to normal, Siegel said.

Meanwhile, U.S. wholesale price data is very encouraging, while initial jobless claims are below 200,000 and housing starts in February were well above expectations, Siegel noted, adding,  “the economy is not disintegrating.”

Current corporate earnings forecasts may be too conservative and should move higher for 2024 when the Fed finally calms inflation, Siegel said. “I don’t think this market’s going down much further,” he said.

Siegel cited attractive valuations for small- and mid-cap stocks and noted that value stocks took a hit recently over recession fears, but that “value is always a great buy” on such fears “because it’s the one that goes down the most.” Current value stock prices averaging about 13 times earnings suggest 7% to 8% real returns for the long run, Siegel explained.

Value stocks now look like they’ll give greater long-term returns than the market overall, he added.

(Image: Lila Photo for TD Ameritrade Institutional)