By Dima Kulakov
Jeremy Siegel, Wharton professor, believes that “stocks will still move higher this year, even in the face of rising bond yields and inflation concerns.”
In an interview, Siegel stated that the $1.9 trillion coronavirus relief package, which President Joe Biden just signed, is simply “more fuel on the fire, so to speak.”
“Eventually there will be a Fed tightening and eventually that tightening is going to pressure stocks, and that fear of that, I think, is beginning to come through now,” Siegel stated, referencing the disjointed equity trading that has happened in the past weeks (“as investors digested a rapid increase in the yield on the 10-year Treasury”).
“But when I see the amount of stimulus come, I can see another 10% rise in stock prices, 10%, 12% this year then the Fed gets more worried and the leveling off 2022, 2023,” Siegel said. “We’re going to get those little fears that are coming through, but it’s going to be overwhelmed, I think, by the strength of the economy and the rise of corporate earnings.”
The Dow Jones closed at a record high of 32,297 on Wednesday. A 10% rise from that level would put the Dow at about 35,530. The S&P 500 ended Wednesday at 3,898.81, so a 10% gain there would put the index at almost 4,290.
The yield on the benchmark 10-year started the year beneath 1%, however, it’s taken off since the finish of January on assumptions for a solid U.S. financial recuperation from pandemic-prompted harm “as well as fears of accompanying inflationary pressures.” The yield (it moves inversely to prices), traded above 1.6% on Friday, near 2021 highs.
Siegel believes “pent-up demand being unleashed on the economy — coupled with the dramatic increase in money supply during the pandemic — will continue to drive yields higher and lead to higher inflation.”
However, Siegel thinks “investors will still prefer to be in equities over bonds, particularly those in cyclical sectors that benefit from an economic reopening.” The longtime bull believes they will outperform tech stocks in the next half to full year.
“Let’s assume bonds to go 2.5% or 3%. If in an environment where have a 4%, 5% inflation — which I really think is going to happen — that’s still not attractive at all [for investors looking for yield]…Remember, stocks are still real assets. They’re claims on real capital, real ideas, copyrights, intellectual property, etc. They’re going to maintain their value in an inflationary environment. … Dividends go up with inflation.”
“If bond yields are rising, you take a double hit,” added Siegel. “You have less purchasing power on the bond and the bond price falls, so we can’t take advantage today of a bond yield 3% a year from now. It actually makes the bond market that much worse compared to stocks, and that’s why the money I think is going to continue to flow into the stock market.”