Wharton School and WisdomTree economist Jeremy Siegel warned Monday that stocks may move lower and are unlikely to surge anytime soon, given the closure in the Strait of Hormuz amid the Iran war.
"For equities, caution is warranted over the short-term. As long as the Strait of Hormuz situation remains unresolved, I do not see the basis for a sustained rally. In fact, I think the path of least resistance is still lower," he said in his weekly commentary Monday.
"We have already been in correction territory in parts of the market, and further downside is entirely plausible if the energy shock persists for months rather than weeks," he wrote. "That said, I still do not view this as the start of a full-scale U.S. bear market even if the Strait of Hormuz was to stay closed for 2-3 months."
Siegel noted that the U.S. "remains far more energy resilient than most of the rest of the world, and that distinction matters enormously."
A prolonged closure could push the S&P 500 into a mid-teens percentage drawdown from its highs, "but I would still stop short of assuming a 20% decline in the U.S. absent a broader global escalation," Siegel added.
The case for near-term Federal Reserve interest rate cuts "has weakened materially," given the rise in the 10-year Treasury yield and oil prices, Siegel wrote. "That is the key message from this market," although an inflationary burst like the one in the post-pandemic surge is unlikely.
That doesn't mean the Fed can move to ease, however, he added.
The bond market, through higher 10-year Treasury yields, is effectively doing the tightening for the Fed, according to Siegel.
The core U.S. economy is "reasonably sound" and not yet signaling recession, Siegel said. But markets can't ignore rising costs and pressures that can result from a prolonged supply disruption, which makes rate cuts less likely in the short run, he wrote.
"Until energy markets stabilize and the geopolitical risk premium fades, investors should remain defensive, expect more volatility and resist the temptation to call for an all-clear too early," Siegel said.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.