Professor Jeremy Siegel of the Wharton School says rising rates are a major impediment for stocks and the market.
Jeremy Siegel: Rising Rates Are A Major Impediment For Stocks
Get The Full Seth Klarman Series in PDF
Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.
Well I was on CNBC Thursday and I said this is a major impediment for stocks this is.
You know two things make up stock prices earnings and interest rates and all that good news on earnings is basically out there. I mean this has been a super year far better than expectation but it's already in those prices. What is not in the prices is this sudden movement upward in the long bond. The Fed saying you know again that it's going to be very very aggressive another hike in December. They say three weeks again in 2019.
This is really competition for stocks. You know the Divinia on the S&P is one point eight. And you know we're going to be almost double that if we move into the threes. That's you got to get capital gains and you know for years you didn't have to get the capital gains to do better. Now you got to get them. I think it's going to be impediment for the fourth quarter. You don't at the at the end of last year I said it's going to be a zero to 10 percent return on S&P. And I thought gee I might have been a little bit too cautious but you know I'm going to stick to that in terms of what this year begins. I think fourth quarters is definitely going to be challenge.
Well because of because of these rates it sounds like you're having a bit of a change of tune to. But we've spoken with you. We've spoken with you recently. You didn't you didn't sound all that alarmed about where the stock market was then we've had this bit of a jump in rates right. But there were four of them all over the rates.
Yeah I. Well that was before the rates moved up. I mean again I mean you know it was between two and three quarters and three and it was sort of that all of a sudden the middle of September it jumped up to 315 a little bit of a trouble. Then it's moved up. Now we have a strong employment report and you know it's psychology. I mean look at all of the potential negatives. I mean we have a government deficit of 800 billion that's pouring onto the market. The Fed is doing negative quantitative easing which means they're selling Treasury bonds. You add those two up that's almost a trillion onto the market. And what are the Chinese then or do they continue to buy. They haven't been buying. So that means that domestic holders have to absorb a trillion dollars of Treasuries and if they think the Fed is going to be aggressive on the short end why are they going to do it at two point eighty two point nine or three percent or maybe even three and a quarter. Again this is psychology. This is these are the sort of factors say Oh my goodness you know I always thought rates should be higher but they weren't so hey we can relax. And now when rates go up maybe the things I was worried about maybe that's going to be a problem for the equity market. And and certainly the bond market by definition and I think that that sort of psychology is going to creep in to the decisions that's going to make this quarter a difficult one again not a bear market. And it's just that the good news is out there. I don't see any more great news. Good news and I see potential real.