The stock market has been hitting all kinds of records this week, and Wharton School professor Jeremy Siegel told CNBC on Friday that he does not see that stopping anytime soon.
“I think fair market value does give us another 5% or 6% this year” on the S&P 500 with the Federal Reserve signalling interest rate cuts ahead, the longtime stock bull said on “Fast Money Halftime Report.”
“But we may go up 10% or 12% before we sell off,” Siegel added, noting the Fed tends to overshoot on both the downside and the upside when adjusting rates.
Fed Chairman Jerome Powell — who dropped rate-cut hints over two days of congressional economic testimony this week — has been widely criticized by Wall Street and President Donald Trump for hiking too aggressively.
After four 0.25% hikes last year, the target range for the fed funds overnight bank lending rate stands at 2.25% to 2.5%. The final Fed increase in borrowing costs in 2018 came in December when the stock market was melting down.
Siegel said he hopes the Fed cuts rates by a half percentage point at its upcoming July 30-31 meeting, though he acknowledges that such a bold move would be unlikely.
Around midday Friday, the CME FedWatch tracker was putting only about a 25% probability on a 0.5% reduction in the fed funds and much larger 75% odds on a 0.25% cut.
The reason Siegel would like to see a deeper cut is because he’s concerned about the fed funds rate being higher than the 10-year Treasury yield, which was around 2.1% on Friday.
At the shorter end of the bond yield curve, the 3-month Treasury rate has actually been higher than the 10-year.
That so-called inverted yield curve, when shorter-term bonds deliver higher rates than longer-term ones, historically has signaled a recession on the horizon.
“The biggest factor here is we really did see an inversion in that yield curve,” Siegel said. “I’ve gone through history, it is one of the most single reliable indicators of a recession. And I worry about that.”