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Investors are giving more weight to economic data than impending rate hikes, says Jeremy Siegel.
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Momentum and FOMO could drive stocks higher in the short term, the professor says.
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But deteriorating jobs data and other negative shocks could derail the rally, Siegel says.
Investors are brushing off the prospect of higher interest rates and piling on stocks, but the buying spree could come to an abrupt end, Jeremy Siegel warned.
“The market is currently prioritizing the strength of the economy over fear of the Fed,” the retired Wharton finance professor said in his weekly WisdomTree commentary, published Wednesday. “We’ll see how long it can last.”
The Federal Reserve’s battle against historic inflation has centered on raising interest rates from near zero last spring to over 5% today, and the U.S. central bank has scheduled some more hikes This year. Higher rates boost the attractiveness of bonds and savings accounts relative to stocks and generally erode corporate profits by raising business interest costs and dampening consumer and business demand. As a result, they tend to depress the prices of stocks and other risky assets.
However, the US economy has proven resilient in the face of Fed hikes, with both growth and employment holding up in recent months. Investors are betting on stocks because they believe the United States can escape a recession and companies can withstand the pressure of higher rates.
Siegel wondered why the Fed continued to press ahead with rate hikes when inflation fell from a peak of 9.1% last summer to 4% in May. He suggested that Fed officials might believe a buoyant economy will fuel inflation, even if current prices for oil and other commodities do not support that view.
“What surprises and disappoints me … is that the Fed continues to step up its tightening and hawkish stance,” he said.
Siegel also touched on the housing market. House prices have climbed for three consecutive months and are now up 40% in a relatively short period. Combined with a 65% rise in average mortgage costs, affordability has fallen sharply, meaning cash buyers are likely to be the ones driving up prices, he said.
The veteran commentator also weighed in on the chances of an economic crisis. “I think we still have high risks of a slowdown in the second half of the year due to potential negative shocks,” he said, suggesting the Supreme Court’s decision to block student loan forgiveness could hurt spending. consumption, and an impending UPS strike could disrupt national supply chains.
Given the mixed backdrop, Siegel issued a cautious market outlook. “I think momentum and fear of missing out on gains can drive the market higher in the short term,” he said, before warning that the rally could lead to overvalued stocks.
The author of “Stocks for the Long Run” also warned that bad news such as weaker jobs data could dampen positive sentiment in the markets. But he pointed out that some value stocks are already rated for a mild recession, meaning they could pay off even if conditions worsen.
Read the original article on Business Insider