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Key Words: Why Jeremy Siegel says stocks can ‘more than compensate’ even if inflation hits 20%

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Talk about running hot.

Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, warned in a CNBC interview on Friday that the Federal Reserve’s easy monetary policy stance in the face of building price pressures could set the stage for inflation to run as hot as 20% over the next two to three years before subsiding.

And while inflation jitters rattled the market this past week, Siegel argued that investors will have little in the way of an alternative to equities and other traditional inflation hedges, given the prospect of negative real, or inflation-adjusted, returns for government bonds.


‘The history is that stocks more than compensate for inflation and there’s a lot of dividend paying stocks — 2%, 3%, 4%, 5%. So why would you go fixed income? The gap is huge. And that’s what I think is going to continue to drive the money into the market despite the fears that the Fed will tighten in the future.’


— Jeremy Siegel, Wharton School

Assets like bonds or cash have little appeal, said Siegel, the author of the classic “Stocks for the Long Run” and a senior investment strategy adviser to Wisdom Tree Funds. “They’re the worst.”

Read: What does inflation mean for the stock market? It’s supposed to be a positive — but investors are spooked now

Siegel repeated his concerns that aggressive monetary and fiscal stimulus would feed into inflation after having already worked its way into financial assets over the course of the pandemic. With the economy beginning to more fully reopen, a sharp rise in the money supply is bound to translate into rapidly rising prices.

Stocks extended a decline on Wednesday after the April consumer price index jumped a stronger-than-expected 4.2% year over year but equities bounced on Thursday and were posting gains on Friday, even if they were on track for weekly declines. The Dow Jones Industrial Average
DJIA,
+1.03%

was down 1.5% for the week, while the S&P 500
SPX,
+1.45%

was on track for a 1.7% decline. Both indexes ended last week at records. The Nasdaq Composite
COMP,
+2.10%

remains down 2.8% for the week.

Meanwhile, Jerome Powell is the “most dovish” Fed chairman in history, insisting on maintaining an easy policy stance as inflation pressures build, Siegel said. The “bump in the road” for the market will come when the Fed finally realizes it has to react and begins to pull back.

Fed officials this past week reiterated their expectation that inflation will surge in coming months thanks to pent-up demand for goods and services and supply bottlenecks, but will fade over the longer term. Powell and other policy makers have said it’s too early to begin thinking about withdrawing monetary support until the labor market is more fully recovered from the pandemic.

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