Wharton professor Jeremy Siegel says a major Fed rate increase could send the Dow down 1,000 points, and ending the hikes could boost the S&P 500 by over 10%
A 50-basis-point hike this week could send the Dow down 1,000 points, Wharton’s Jeremy Siegel said.
If the Fed ends its rate hikes and productivity improves, the S&P 500 could jump 10%, Siegel said.
The veteran professor flagged signs of US economic weakness and sounded the recession alarm.
Stocks could tumble if the Federal Reserve surprises investors with a 50-basis-point hike to interest rates on Wednesday, instead of raising them by the expected 25 points, Jeremy Siegel has warned.
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“There will be tremendous selling pressure for the risk markets, and we could easily see a 1,000-point drop in the Dow immediately,” the Wharton finance professor said in his WisdomTree commentary this week.
That would represent a 3% decline from the Dow Jones Industrial Average’s level of about 33,700 points as of Monday’s close.
On the other hand, the author of “Stocks for the Long Run” has suggested the S&P 500 could surge by over 10% to around 4,500 points if the Fed promptly pivots to cutting rates and worker productivity improves. He issued the forecast during the latest episode of the “Behind the Markets” podcast.
US inflation surged to a 40-year high of 9.1% last June, spurring the Fed to hike rates from nearly zero in March to over 4% by the end of December. Higher interest rates deter spending and borrowing, which can relieve inflationary pressure, but can also weigh on asset prices and economic growth.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
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Siegel has repeatedly underscored the critical importance of Fed policy to the fate of the US economy and stock market. A 50-point hike would be a “disaster for the markets” and would widen the gap between the Fed funds rate and the 10-year Treasury yield, which would “certainly be a harbinger of a recession going forward,” he said on the podcast.
The veteran academic outlined what investors want to see from the central bank, and why a delayed shift to cutting rates would be dangerous.
“They want the Fed to ‘get it’ and recognize that inflation basically has been stopped,” Siegel said. “If the Fed doesn’t pivot very soon, it seems to be very hard to avoid a recession in the second half of 2023 and early 2024.”
Siegel, in his commentary, laid out why he believes the US economy is already under the cosh. He flagged evidence of weakening domestic demand and consumption, and argued the recent wave of layoffs is yet to be reflected in unemployment data. He also pointed out that money supply, a key driver of inflation, registered its largest annual contraction since the Great Depression last year.
Moreover, the Wharton professor explained why he’s optimistic about stocks this year. If companies get rid of their worst workers, that could boost productivity, alleviate cost inflation, and boost their profits. Larger corporate earnings support higher stock prices, he noted.
