Jeremy Siegel sees stocks climb 10% more in 2021; Covid Relief adds fuel
Jeremy Siegel of the Wharton School told CNBC Thursday that he believes stocks will still rise this year despite rising bond yields and inflation concerns.
In an interview on Squawk Box, the finance professor said the $ 1.9 trillion coronavirus aid package that President Joe Biden plans to sign on Friday is “more fuel on the fire,” so to speak.
“At some point there will be a tightening of the Fed, and at some point that tightening will put the stocks under pressure, and this fear of it, I think, is beginning to arise now,” said Siegel, referring to the troubled stock trading that has been going on over the past few weeks Investors digested a rapid surge in the 10-year Treasury yield.
“But when I see the momentum coming, I see stock prices rise another 10%, 10%, 12% this year, then the Fed is more concerned and the flattening in 2022, 2023,” Siegel said. “We’re going to get these little fears that get through, but I think they’re going to be overwhelmed by the strength of the economy and the surge in corporate profits,” he added.
The Dow Jones Industrial Average closed on Wednesday at a record high of 32,297; A 10% rally from there would bring the 30-share Dow to around 35,530. The S&P 500 closed at 3,898.81 on Wednesday, a 10% rise would bring the US benchmark index close to 4,290.
The 10-year benchmark’s return started the calendar year below 1% but has been rising since late January on expectations of a strong recovery in the US economy from damage caused by pandemics and fears of accompanying inflationary pressures. The yield, which moves inversely with prices, was trading at 1.5% on Thursday, falling from the year-long highs of over 1.6% in recent days.
For his part, Siegel said he believes pent-up demand unleashed on the economy – along with the dramatic increase in money supply during the pandemic – will continue to increase yields and lead to higher inflation.
However, Siegel said he thinks investors will continue to prefer stocks to bonds, especially those in cyclical sectors that will benefit from an economic reopening. The longtime bull told CNBC earlier this week it believes it will outperform technology stocks in the next six to 12 months.
“Let’s say bonds go up 2.5% or 3%. In an environment of 4% inflation, 5% – which I think will happen – is still all for investors looking for yield not attractive, “said Siegel Thursday. “Remember, stocks are still real assets. They are claims of real capital, real ideas, copyrights, intellectual property, and so on. They will hold their value in an inflationary environment. … dividends rise with inflation.”
“If bond yields go up, you get a double hit,” added Siegel. “You have less purchasing power on the bond and the bond price is falling so today we can no longer benefit from a bond yield of 3% a year. This actually makes the bond market much worse compared to stocks, and that’s why I think the money will continue to grow flow into the stock exchange. “