Siegel: Fed Will Hike Rates Soon, Slamming Stocks

Economist Jeremy Siegel is generally an optimist about the stock market, but not in the face of continued hotter inflation, which now has topped 5% for five straight months. So he predicts the Federal Reserve will soon move to jack up short-term interest rates—with an ill effect on the market.

His remarks, made on CNBC, came after Wednesday’s release of the Consumer Price Index (CPI) for October, up a daunting 6.2% over the previous 12 months, the biggest increase since 1990. That news triggered a sharp market slide, ending with a tiny increase in the S&P 500 Thursday. “This was a troublesome report,” especially for stocks, he said.

“Stocks love inflation until the Fed gets serious about it, and they have not been serious about it,” Siegel said. Right now, the market’s reaction to the latest inflation report is a bump, he added. Once the Fed tightens policy, however, he predicted that investors would pull down share prices. Nothing will happen, he explained, “until the Fed changes direction and says, ‘You know what, we’ve got to be much more serious.’”

Siegal, a professor at the University of Pennsylvania’s Wharton School, pointed out that the Fed’s policymaking body meets Dec. 14 to 15, shortly after the next CPI release, on Dec. 10. “Maybe it’ll be at the December meeting,” Siegel suggested, regarding a rate hike decision. “Maybe it’ll be a little bit later.”

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The first step, he said, would be for the Fed to act sooner than expected to lift the fed funds rate, now near zero. Boosting this benchmark for short-term rates is widely anticipated to begin in 2023. The central bank also could speed up the tapering of its bond purchases, a program that impacts longer-term rates. Such a phase-out is supposed to start later this month and last until mid-year 2022.

Siegel has warned for months now that inflation was fiercer than the Fed and its chair, Jerome Powell, have depicted. Even Powell, though, has hinted recently that the Fed might be compelled to combat the rising prices if inflation fails to cool. His line has been that the CPI spiral is temporary, mainly linked to supply chain kinks.

The professor noted that a host of factors are propelling the market upward, such as copious liquidity, seasonal late-year pushes for stock buying, and a scarcity of better investment alternatives. While a little inflation has long buoyed stocks, because it betokens an expanding economy, too much of it eventually wears on investors, he said. Indeed, tech stocks, the vanguard of the current rally, don’t respond well to higher rates, which tend to shrink future expected profits.

For now, he said, the positive factors outweigh inflation, “until Powell comes and says, ‘You know what, it isn’t temporary. It’s more serious than we expected. We’re going to have to speed up taper and we may have to speed up the rise of interest rates.’”

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Tags: Federal Reserve, Inflation, Jeremy Siegal, Jerome Powell, Stock Market, Wharton

Health products company Johnson & Johnson announced this morning that it will be splitting into two separate, public companies, leaving many shareholders wondering what this means for stock prices. For now, the move seems to have caused a slight bump to the current firm’s price, with shares rising from 163.04 to 167.43 within minutes of the day’s open.

Johnson & Johnson stated in a press release that the separation would allow each business to “pursue more targeted business strategies and accelerate growth.” As a general rule, the medical devices and drug part of the company saw much faster growth than the relatively stable and low-risk consumer health side of the company. Its consumer health products sales have grown approximately 0.7% a year over the past two years. On the other hand, its pharmaceutical sales grew by an average of 5.8% over the past two years.

Some have also wondered if the split has anything to do with J&J’s recent asbestos scandal. The company was accused of producing and selling talc baby powder with the cancer-causing chemical inside. The accusation has led to approximately 38,000 lawsuits against the company.

In a move that seemed to foreshadow today’s split, J&J separated off the portion of the company that dealt with the baby powder and created a new company called LTL. LTL filed for bankruptcy in October, making it difficult, if not impossible, for plaintiffs to recover the full amount of monetary damages they were seeking.

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