More Fed Rate Hikes? No Problem: Why Wharton's Jeremy Siegel Is Optimistic About Economy, Markets

Federal Reserve Chair Jerome Powell spooked markets after signaling a possible return to bigger interest rate hikes at the March meeting. Ahead of the first day of Powell’s Congressional testimony, Wharton Professor Jeremey Siegel offered his thoughts on the near-term rate trajectory.

What Happened:  The Fed is going to hike rates again in March and the moot point is whether it is 25 basis points or 50 basis points, Siegel said in his weekly commentary for WisdomTree Investments, where he serves as a senior investment adviser.

He premised this deduction on recent strong data, including the January jobs report, weekly jobless claims data and production and GDP data. Commodity indices have also stabilized at low levels, signaling that they may not plunge further, he noted.

Among other indicators, the M2 money supply stabilized in December as opposed to expectations for further declines, the apartment list rental index saw an uptick in February, while the December Case-Shiller house price index did not fall as sharply as expected, according to Siegel. 

The magnitude of the March rate hike would hinge on Friday’s employment report, which is widely expected to show an addition of 200,000 new jobs, Siegel said. 

If the report shows bigger-than-expected job additions, hawkish Fed members may clamor for a 50 basis-point hike, he added.

See Also: Best Companies To Invest In

No Pause Until... Siegel said he does not expect a pause in rate hikes until the job addition tapers to zero or becomes negative. The tightness relayed by the more timely initial claims data is too strong for a pivot yet, he added.

The economist believes the market is factoring four rate hikes of 25 basis points each through October. These hikes, he said, could be one 50 basis points and two more 25 basis points.

Although he still thinks these hikes are unnecessary, Siegel said, looking at the resilience of the economic data, it doesn’t look like the increase would be as damaging as he feared in the fall.

“I’m now more sanguine about the Fed increasing rates since the economy seems to be withstanding these higher rates better than I anticipated,” Siegel said.

The economist is of the view the consensus earnings estimates for the year could be conservative for the year, given the economy’s resilience and productivity gains achieved on the back of more cost control. 

The S&P is still trading at a 19 times P/E multiple but a fair equilibrium multiple for the market could be 20 times earnings, he said. Therefore valuations are not high, he added.

“I am sticking with my calls for a robust equity market that brings gains of 10-15% for the year,” Siegel said.

Read Next: Critical US Jobs Report Coming On Friday: What Investors Should Expect