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Dan Loney: Well, we know that the
markets do not like uncertainty, and certainly we have seen a lot
of that play out in recent
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months, especially on the global
front. But just how are the markets responding to all of
this latest action? Pleasure to
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be joined by Wharton Emeritus
Professor of Finance, Jeremy Siegel. Hi, Jeremy,
how are you, sir?
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I'm fine. Dan, good to be on
your program. Thank you, sir. All right. So
give us your thoughts, as all of
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this has played out over the
last few weeks, and how Wall Street has kind of reacted to
it.
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Yeah. Well, there's— there's a
number of things going on. A— and I say apparent, because the
final chapter in Iran and Israel
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has certainly not been written,
and whether it will ever be completely written, we don't
know. But at least at this point,
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on that side, as we see oil drop
down to pre-Israeli strike levels, low levels, that risk
seems to have gone way down,
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certainly in the short run, of a
spike in oil prices. The market likes that. And the market likes,
certainly, the prospects that,
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you know, some— some peace
or reconciliation can happen in the Mideast. So that— that
is a positive development. The
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big thing is, on the the tariff
front— yes, we are approaching those so-called July 2 or July
9, whatever you want to say,
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deadlines for potential
reimposition of the so-called Liberation Day tariffs. The
market doesn't think it's gonna happen.
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The market thinks
that basically, any country that is going to start at least
presenting some plan is going to
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be given an extension. The
market has also decided that it could live with a 10% general
tax and a 30% tax on China.
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Doesn't like it. It'd prefer not
to have it. And, of course, I— you know, what would— say, you
know, 50% on aluminum, and there
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are some on cars— doesn't
like those, but it could live with that.
- Right. And is the 10% kind of
already baked in at this point?
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I think the 10% is baked in. It
doesn't— it would be really very surprising to me,
although not impossible, that
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that minimum will last at
least through the Trump administration, which we're
talking about, you know, three
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plus years. So I think that
is baked in. Now again, if, if—if inflation becomes
more, if people are convinced
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the tariffs are bad, you know,
he may have to adjust that, you know, may have to wait until the
midterms. You know, we— a year
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from November to do that. But
pretty much right now, I think the 10% is— is the— is baked
in. Why the— why is the
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stock market within a hair's
breadth of all time highs? Because it thinks that, despite
the hurdle of the tariff, that—
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that they can overcome much of
the harm that that's done. Maybe not all, but much of it. You
know, there's the old saying,
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invention is the— necessity is
mother of invention. Yeah. Or I would say, adver— it's basically,
adversity is what can cause
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invention. Adversity is the
mother of invention. And where does where— where, I think, the
market sees is a more serious
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usage of AI. Now, you know, AI—
we all know about the AI firms and all the promise and the
hype. The truth is, is that most
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firms have not used it anywhere
near to the extent they could, to cut costs. Now they're going to
be forced to. You know— you
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know, just like, you know, these
podcasts, these Zooms. What happened during Covid. You know,
I mean, Zoom existed before
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Covid, no one used it. Then it
was forced to use it. Now we use it and, you know, we use it
extensively. There are many
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other things that, you know, force
you into positions which you actually find might be useful.
The terrorists can force them
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into positions where, you know
what? They go to a lot of their thing and say, "Listen, you
either need to be more
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productive or, you know, I have
to say, we have to let you off. Because, you know, with these
higher prices, our margins are
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being squeezed, and we have to
work everywhere we can to restore the margins." So that is
what I believe is— is in the
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minds of investors as to why
that risk of profits may not be damaged as much as Wall Street
originally thought, and why not—
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inflation may not be as much— as
bad as they thought, and may— maybe GDP not be as bad. Now,
again, I don't like tariffs.
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They're— they're a sales tax.
They're really like a sales tax. And if we consider the 10% sales
tax, so almost like a value
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added tax of 10%, but just on
imported goods. And I particularly don't like, you
know, 50% tariffs. They just
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protect— protect inefficient
industries. It's not a good economic idea. Nonetheless, the
dynamics of potential and AI
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potential to lowering cost is
such that, in my opinion, the market is looking beyond that,
and then to an extension of the
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Trump tax cuts and a lighter
regulatory touch. How important, then, is the second
half of this year to
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understanding just what— you
know, because there's— seemingly it's a lot of conversation about
what's going to happen with the
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economy. Fed Chair Powell kind of
holding, you know, for right now, whether we're going to see rate
cuts in the second half of the
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year, because he wants to see
the impact from the tariffs. It feels like the next six months
are going to really, potentially,
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give us a little bit more
knowledge to see what we might see play out as we go
into 2026 as well.
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Yeah, absolutely. I
mean, first of all, you know, most of goods are still being
sold out of the inventories that
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were bought pre-tariff. But that—
and the third quarter, those— those inventories are basically
down. So they're going to have
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to make efficiency gains or
raise prices. And— and in many cases, they got to raise prices.
You can't have efficiency gains of
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25, 50%. So there will be prices.
We'll have to see how the economy does respond. You know,
it's my firm belief that the Fed
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should not raise because of
tariffs and the inflation that it causes. It's like, you know,
if I said that, you know,
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the government decided on a
national sales tax of 10%, and eliminated, let's say, the
income tax, or reduced it, should
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that mean that the Fed should
tighten policy, just because we know that the price of consumer
goods'll go up, even though
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there'll be more income for
consumers to buy those goods? The answer is no. You should only
really tighten when
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inflation is caused by too much
demand. In my— I don't see that coming. So I'm in the camp of
definitely loosening. I don't
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know if they will. We have
several Fed speakers that are now even talking about a July
cut. I think that, truthfully,
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Powell is on the fence. And we
still have, you know, four or five weeks of data before that
happens. And we will look at it
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to see a signs of slowdown.
There already has been slowdowns. I mean, GDP is
distorted. You know, maybe 4%
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this quarter, or 3/8.
But it was minus the first quarter. You average the two,
you get two. That's not
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terrible, but it is lower than
the two and a half to three that we averaged last year. You know,
it isn't like it's— in other
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words, going gangbusters. And
the trend is— is potentially down in the third
quarter, when all this
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excess buying and pre-buying and
selling out of inventories washes out, we do see
that— that true effect. I do
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think the Fed will be lowering
those rates. The question is, will they do it in time to
prevent a real slowdown? I don't
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think there's going to be a
recession from this, but a real slowdown. And if it stays at 10%,
there'll be a slowdown. Then, you
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look at the 2026, no more— if
there's no more tariffs, if, you know, other productivity factors
come into play, it could be a
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good year, still, for stocks. Jeremy, great to talk with you
today. Thanks very much for your
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time. Look forward to chatting
with you again soon. Thank you, Dan. Thank you. Jeremy Siegel,
who is a Wharton Emeritus
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Professor of Finance.