"But as I look at the cumulative weight of evidence and recent data, I now believe the Fed is not as tight as I feared," he wrote. "This will not give the Fed a full reprieve from my criticism: the Fed still kept interest rates far too low in 2020 and 2021 and I do not believe it needs to hike any more at this point."
Siegel, however, pointed to several factors that have changed his mind on economic risks.
He noted that the dramatic increase in money supply during the COVID-19 lockdown crisis in 2020 and 2021 "spurred my warnings of rapid inflation from the pandemic," and said the Fed should have identified inflation pressures and removed their accommodation much earlier.
Then the Fed "slammed the brakes" and caught up with 500 basis points in rate hikes over a short time, causing the money supply to decline at levels not seen since the Great Depression, Siegel said, adding that the decline in money supply appears to be over.
Reassuring Signals
Three indicators now imply that real interest rates and the Fed's rate-hike projection aren't excessively high, he wrote.
- The money supply seems to be recovering, which Siegel said is lowering his angst.
- Housing prices, which soared in 2020 and 2021, started falling when the money supply first contracted but recently have turned the corner. "I'm not going to say housing price increases are a permanent trend change with 7% mortgage rates, but we've had a consecutive string in housing price gains," he wrote.
- Commodity prices, which are very sensitive to economic growth pressures, look like they've bottomed and ticked up again, Siegel said.
Meanwhile, jobless claims signal an economy that's growing modestly rather than a recessionary decline, he said.
"This week the Fed will hike rates another 25 basis points. I would still say the downside risks to the economy of this action outweigh the upside growth risks, but not by as much as before," Siegel wrote.
Value stocks are pricing in a recession, with the non-tech sector in the S&P 500 selling at 17 times forward earnings, the median multiple for the last 30 years, according to the economist. Dividend weighted indexes are priced even lower and there are value baskets trading even cheaper, he noted.
"If you agree with this upgraded assessment of the economic growth picture, value tilts are likely to be rewarded," he wrote. "AI hype turbocharged growth stocks after initial fears of a recession hurt more cyclically prone value stocks. But the break in growth stocks last week showcased well the old saying 'staircase up, elevator down."
Siegel said his shift in view "is not set in stone. If the forward indicators reverse and deteriorate, I am willing to revert to my previous forecast that the Fed will have to reduce rates rapidly. However, at this moment the indicators show a firm economy."
Photo: Bloomberg
