Economics

Should Investors Be Worried?

Wharton’s Jeremy Siegel discusses the recent losses in the stock markets.

With investors straining to see what’s next in U.S. stock markets after three dark days that erased some $4 trillion in value globally — just after many new highs — Wharton finance professor Jeremy Siegel noted midday Tuesday that the recent losses are an overdue correction. Now markets appear fairly valued. “The market went up too far, too fast in January,” Siegel said of the strongest New Year rise in history. There were a “lot of momentum players, trend followers … they all had stop orders to sell [at a certain price] and they jumped off the train. … [The] ride is over.” The moves in recent days “blew the fluff off” after having so many days of 200-point gains in January, he added, suggesting they did not portend much larger drops ahead.

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The Dow Jones Industrial Average plunged the most ever on February 5 — on a point, though not on a percentage, basis — giving the market whiplash following so many days of record-highs in recent months. With the S&P 500 and the Nasdaq both posting losses around 4%, and global markets also taking a big hit, it was a surprise return to volatility despite what appeared to be a calmer day at midday Tuesday. At the low point Monday, however, the Dow had shed close to 1,600 points.

Will the market go down much more? “It might, but I think those buying now are OK for longer-term investments. I say sit pat,” Siegel said. For those who are sitting on some cash and have been wondering what to do, “this may be the time to put some in if the market got away from you.”

Siegel added that longer-term trends for the economy look strong, so strong that he believes the Fed may raise interest rates four times in 2018 rather than the three most have forecasted. The reason: Continued strong jobs numbers may already be leading to wage-push inflation, and Siegel said that the Fed will be very sensitive to that. At the current unemployment rate of 4.1%, should current rates of job growth continue — 150,000 to 200,000 per month — unemployment would drop to 3.5% by year end. Almost all analysts would say that would create an inflation rate unacceptable to the Fed. Job growth of around 50,000 per month in the current economy would be closer to an equilibrium level.

Last month, Siegel predicted a possible correction of up to 10% in U.S. equity markets at some point during 2018. He also forecast that the market would end the year somewhere between being flat and up 10%. That made him, for the first time in life, he said, the most bearish person in the studio when he appeared on various television shows recently to discuss his market outlook. He called Monday’s drop in the Dow a “pipsqueak” at 4.1% compared to a one-day drop of 22% back in 1987.

Siegel offered his views on the Knowledge@Wharton show, which airs on SiriusXM channel 111. (Listen to the podcast above). An edited transcript of the conversation will be posted shortly.

Article by Knowledge@Wharton