The stellar jobs report on Friday could be bad news for stocks and the economy, Jeremy Siegel said.
The Fed may keep hiking interest rates to keep inflation in check, the Wharton professor warned.
Siegel still expects the Dow Jones Industrial Average to climb 18% to 40,000 points by 2025.
The US economy’s surprising resilience could be bad news for stocks, and might raise the risk of a recession this year, Jeremy Siegel has warned.
The US added 517,000 jobs in January, government data released Friday showed, crushing the 185,000 consensus nonfarm payrolls estimate from economists surveyed by Bloomberg. At the same time, the US unemployment rate fell to 3.4%, its lowest level in more than 50 years.
Siegel, a professor emeritus of finance at the Wharton School, said in a Fox Business interview Friday that the unexpected strength of the labor market could result in the Federal Reserve keeping interest rates higher for longer.
In response to historic inflation, the US central bank has raised rates from nearly zero to almost 5% within the past year. Higher rates can curb price growth by making borrowing more costly and encouraging saving over spending and investing. But they can also crimp demand and sap economic growth.
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Moreover, rate changes can take several months to ripple through the economy and fully set in. The Fed may be courting disaster if it keeps hiking, Siegel cautioned.
“This tremendous tightening, one of the greatest in history, its effects have not been felt,” he said in the interview. “I would prefer that they stop now; I think there’s enough evidence that prices are down, that they could pause and wait and see the course.”
“Continued increases will increase the risk of a recession in the second half of this year,” he said. “Hard to believe given this blowout jobs report that we had Friday, but that can turn around very, very quickly.”
Siegel emphasized that underlying prices have cooled sharply over the past three months. He urged the Fed not to crack down on wage growth, as higher wages will help fill job vacancies, and many workers need higher pay to catch up with inflation.
The author of “Stocks for the Long Run” also outlined his reaction to the jobs report in a Bloomberg interview on Friday.
“Now it looks like the pause of the Fed is less likely,” he said, although he noted other data releases could change the economic picture by the time of the next Fed meeting in late March.
Siegel underscored that a strong economy could weigh on the stock market. While it supports larger corporate profits and therefore higher stock prices, it can also precipitate higher rates, dampening demand and reducing the appeal of stocks relative to bonds and savings accounts.
Still, the veteran professor reiterated his view that the benchmark Dow Jones Industrial Average US stock index will climb 18% to 40,000 points by 2025.
“That’s a very eminently reasonable projection, and in fact it could go higher,” he said.
Prior to the jobs report, Siegel predicted the Fed would cut rates significantly later this year in response to cooling inflation, a weakening labor market, and the rising risk of recession. He also suggested stocks could notch a roughly 15% gain this year.