Stocks remain a good long-term investment, but there’s no near-term upside given the tariffs President Donald Trump has imposed, economist Jeremy Siegel said Friday after a convulsive week on Wall Street.
“Are stocks still good for the long run? Absolutely,” Siegel said on a webcast hosted by WisdomTree, where he is a senior economist.
“In my opinion, the longer-term returns, not necessarily the shorter term, the longer-term returns are more attractive now than they were on Feb. 9, when the stock market was at its all-time high,” the Wharton School emeritus finance professor said.
In the meantime, however, investors shouldn’t expect new record highs, he cautioned.
“As long as the tariffs are in place at this particular level, I see no upside to the U.S. markets. And even if they are taken off, it is hard for me to see (markets) going back to the all-time highs that were reached in February,” he said.
The tariffs and their implementation have "really hurt the brand" of the U.S. and its exports — "not irreparably and not so that it crashes the stock market or anything" — but enough to have a "lingering longer-term impact on the economy," Siegel said.
The stock market rose Friday on a report that a Federal Reserve member said the central bank was prepared to provide support if new tariffs tank the economy, Siegel noted. In addition, he said, “I think a lot of shorts got kind of scared of coming into the market after what happened Wednesday,” when a social media post by Trump sparked a massive rally.
As for the fast but orderly retreat from the U.S. dollar and Treasurys last week, Siegel said, “the world is beginning to question the dominance of the U.S. as a world reserve currency, and whether the U.S. is going to be the leading economic growth engine into the future.
“So some people are worrying about whether they should be holding U.S. government bonds," he said. "Foreigners do hold one-third of our national debt, which is over $10 trillion. There's always the threat, if there's further retaliation, that China could unload some of its bonds or persuade others to unload some of its bonds.”
That's one source of the rise in the bond yield, he said. The other is House passage of Trump’s budget, which would increase federal deficits. “That is a worry going forward," he said. "And of course, the deficits will increase even more if there's a recession. So you have a double whammy on the deficit.”
He linked last week’s movements in the dollar and bonds to sentiments on whether Trump will negotiate with China, or to what extent, on lowering tariffs that now amount to an embargo. A virtual mutual embargo by China and the U.S. “is a huge shock to the world trading system,” Siegel said. He noted that consumer sentiment has almost hit an all-time low, which isn’t good for spending.
The market expects Trump to cave to China on tariffs as he caved on reciprocal tariffs — otherwise the stock market would be 15% lower, Siegel said. “Now, we won't call it a cave-in, we'll call it a mutual negotiation. And of course, we'll call it a success no matter what happens.”
Amid the gyrations, financial markets are functioning well, although there’s probably "thinness" in some, according to Siegel.
“It's just a question of price and what you're going to buy it at. I mean, the markets are perfectly absorbing all of this. They absorbed the tweet on Wednesday with a rise,” he said.
“So markets are absolutely functioning," he added. "It's just a constant reassessment of, for equities, the profits going forward, the potential depth of the recession, and what that means for margins going forward.”
Jeremy Siegel. Courtesy photo
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