Professor Siegel's Weekly Commentary Archive
It Has Been a Fascinating Beginning to the Year
January 23, 2023
It has been a fascinating beginning to the year, and now we are in the heart of earnings season. The bond markets have certainly taken notice of the inflation views we have been sharing in these weekly commentaries.
But for equities, we are in a big struggle and it just seems like the Fed doesn't get it. Again, we received very good inflation data this week. The Producer Price Index (PPI) came in below expectations. And economic data continued to come in quite soft—with very weak retail sales and lower New York manufacturing reports.
But the very big disconnect is that despite the weakness we see in manufacturing, the labor market is extraordinary and it shocked me that initial jobless claims fell below 200,000 this week. Unfortunately, until the Fed sees weakness in employment levels, I believe the Fed will likely keep up a misguided inflation fight.
We are seeing more headlines of job cuts in tech and financials—the latest being Microsoft, Google, Amazon, Blackrock, Goldman—which all announced job cuts recently. But so far, the cuts are modest. Perhaps this will accelerate after bonus season passes and firms see natural turnover.
The equity market certainly worries the pivot from the Fed will be too late to resuscitate the economy. The Fed could be facing an economic train going downhill much faster than they expect.
The bond market sees lower inflation and possibly a recession and it likes this combination. The 10-year TIPS inflation-adjusted yields have dropped considerably and that drop in discount rates has been supportive for equity markets.
I still believe we will get a 25-basis point increase from the Fed at the February meeting, although some at the Fed have still talked about 50 basis points being possible. But I am thinking 25 basis points is likely because I continue to see weakness in the real data.
I should also comment about the drama in Washington about a potential default on our debt. There will be a game of chicken to the very end—and it will make a lot of noise for the markets. Let me be clear. There will never be a default on government debt payments in my view. If the stock market goes down in June as we get to the final hours without a deal and all the uncertainty, that could be a very good buying opportunity.
Nobody wants to be blamed for chaos in the markets if the government delays payments on the debt. Could there be very large declines in the markets if the politicians fail? Yes, there will be ups and downs in negotiations until the last minute. But the Republicans will end up with most of the blame if there is a crisis when they vote against raising the debt ceiling.
We've talked about how a mild recession could cause a $15-20 drop in S&P 500 earnings this year. Investors are well served to look beyond these recession level earnings, even though cyclically markets always decline during recessions. Multiples should go up on recession depressing earnings and that will be a conversation I am sure we will be revisiting this year as we get through earnings season and beyond.
Past performance is not indicative of future results. You cannot invest in an index. Professor Jeremy Siegel is a Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.