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Wharton Economist Jeremy Siegel Warns of Potential Market Correction
by Chad Naylor

11/24/21

In a recent interview on CNBC, noted Wharton economist Jeremy Siegel warns that there could be a market correction in mid-December when the next report on inflation comes out. You can read the full interview article in the link here.


Briefly summarizing his statements, Siegel believes that the Federal Reserve has taken a passive approach to controlling inflation which has allowed money to flow into the market. This has created a bubble in bonds, as well as high-P/E technology and growth stocks.  


Even though Siegel is worried about short-term stock market volatility, he is still invested in stocks because he feels that “bonds are getting worse and worse [and] cash is disappearing at the rate of inflation which is over 6%.” He explained that in this situation, it is better to be invested in something tangible, and “even with a little bit of bumpiness in stocks, stocks are real assets…which in the long run are going to maintain value [in the face of inflation, whereas cash will not].”  


The caveat to owning stocks right now is that it very much depends on the specific company. Siegel predicts that rising inflation and a market correction will be detrimental to technology and growth stocks. Over the last couple of months, these growth stocks have surged even higher due to fear of the Delta variant and rising COVID cases. However, he believes, as do we, that the current COVID surge will abate as more people get their booster shots. We might add that COVID waves tend to abate over time on their own, children are now getting their shots and the new Pfizer drug will soon be approved. This new treatment has been shown to lower hospitalizations and deaths by nearly 90% with the relatively easy at-home treatment of a 5-day course of pills.  


With this trajectory of rising interest rates and ultimately the resolution of the COVID pandemic, Siegel is worried about growth stocks, but feels positive about value stocks. “Value has gotten very cheap.” An example of this phenomenon played out in the market on November 23rd when the specter of rising interest rates hit home. The tech-heavy NASDAQ fell 1.3% and our value stocks increased 0.8%, as investors rotated out of growth and into value. If inflation continues along its current course and interest rise as predicted, we expect a lot more of these "rotation" days to further benefit our stocks.


Specializing in value stocks, we at Naylor & Company feel very good about the long-term prospects of our value stocks, even though we, like Siegel, see serious headwinds for growth and technology stocks.
We are more than happy to discuss Siegel's comments and our investing strategy if you have any questions. Otherwise, rest assured that we are using these market conditions to find good value stocks around the world that we believe will perform well in the current re-opening of the world's economies and in the years ahead.