University of Pennsylvania Wharton School finance professor Jeremy Siegel joins “Power Lunch” to give his take of what the Fed’s press conference can mean for markets moving forward.
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Jeremy Siegel: The Fed Should Have Considered The Market’s Wishes More
Do you think that sentiment has gotten overdone that the market is oversold that it's just throwing a tantrum about the Fed. Or do you think there's a real economic slowdown materializing.
Well first of all I was pretty shocked when I saw the statement at 2 o'clock. I said Oh boy. I shook my head and said this isn't good. They barely acknowledged any slowdown. I mean the wording was just so cautiously more dovish. Don't forget I mean we talk about the fact that they lowered by from 3 to 2 the number of projected funds increases next year. But the market in the futures market they lowered it to from 3 to 1 barely 1. So I mean they're back there behind the curve. They're behind what the fears of what the market our market are professor.
But here's the debt load. Is there an economic slowdown. We got the jobless claims number this morning. It was at 250000. It was very low. This is the reason.
And this is the reason the Fed has mandated look at U.S. data and believe it or not U.S. data looks quite good. Europe tweeted jobless claims the last two months have been down. I was worried a month ago. They're down. Retail sales in November were quite good. Housing stock. Surprise surprise on the upside. That's what they look at. They're not going to take any cognizance of the global economic situation unless they see that directly influencing my professor we aren't sure that they should they need to look at those economic indicators should they be looking at what the markets seem to be broadcasting.
We spoke with Ed Lazear earlier this morning and he said absolutely the Fed should take a look at the markets message more and incorporate that into their thinking.
I think they absolutely should have. I mean I am shocked that 10 year down and 275 I mean barely positive slope. Now the yield curve I I was very surprised on the dot plot only two members thought it should not have a December hike and they were not the voting members. I mean we actually know they are. You know James board Neel Kashkari You know they've been outspoken on this and no one joined them. No one joined them said let's take a look at this curve. Let's you know we can pause at this time. So they are behind. However. They they're capable of catching up. I mean I remember 2000 to 2001 there December the market thought they should lower it. They didn't. The the economy went south and then in January they did a double decline. Before the meeting they said Yeah you're right guys really underestimated how poor this economy is and they didn't. Then they caught up or tried to catch up. So it isn't hopeless but it was really disappointing in terms of their acknowledgement of what the market was saying and I'm not surprised that the response given the disparate views between the Fed and what the U.S. markets are telling us.
Professor Siegel should investors be lulled into thinking that valuations look historically fine. Or should there be an embedded discount in the valuations that we're seeing right now because of the outlook.
Well right now we're trading at 15 times earnings the S&P 500 15 times operating earnings for this year. Even if we have no increase it's 15 times earnings of next year. Now the 65 year average is 17 text with little over 17. So we are actually selling at a discount of around 15 percent from the long run average and also in a very low interest rate environment. I think long term investors are definitely going to be rewarded. However remember if there is a recession earnings are going to drop 20 percent. We're no longer at 15 you're at 18 you're worried about.