Jeremy Siegel: Stock Market Shifting in New Direction
Investors' recent move out of tech could "define the next phase of market behavior," the economist says.
Investors may be shifting from erratic technology growth stocks toward dividend-paying equities as the market anticipates interest rate cuts, WisdomTree and Wharton School economist suggested in his weekly commentary Monday.
The stock market, responding to Federal Reserve Chairman Jerome Powell’s comments last week signaling interest rates will start coming down soon, made a “noticeable tilt towards value, dividend-paying and smaller-cap stocks after his talk,” Siegel wrote.
“This trend reflects a broader anticipation of decreasing interest rates, making bonds less attractive to stocks in comparison. It also suggests a potential shift in investor preference from high growth but volatile tech stocks, to more stocks paying good dividends, a realignment that could define the next phase of market behavior,” the economist added.
Powell, at a Fed meeting in Jackson Hole, Wyoming, said the upside risks to inflation have diminished and the downside risks to employment have increased.
“The time has come for policy to adjust,” the Fed chairman said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Powell’s comments “were more dovish than I anticipated,” Siegel said, noting the Fed was clearly heading toward a lower benchmark interest rate and its focus moving from inflation risk to employment.
Powell noted “a clear softening in the labor market” and indicated further weakening wasn’t welcomed, Siegel wrote. “In other words, he will not seek to use higher unemployment as a force to finish the job of getting inflation to 2%. This is a very important shift.”
Siegel expressed certainty that that Fed, at its next meeting, “will finally be forced to discuss their endpoint — the natural rate, else how would they know how fast to reduce the fed funds rate?”
The economist reiterated his belief that the Fed should lower interest rates to 4% or less “without delay to minimize recession risks. I have held the opinion that for over a year there has been no risk of a flareup of inflationary pressures.”
The employment report in coming weeks will be key, as it likely will help determine the size and pace of Fed rate cuts, according to Siegel, noting also that war in Eastern Europe and the Middle East add market risk, “producing a good bid for bonds.”
Credit: Lila Photo for TD Ameritrade Institutional