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Dan Loney: Well, the markets have
had a pretty good run towards
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the end of the year here in 2024.
Part of that could be tied to an
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expected deregulatory approach
by the incoming President in
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Donald Trump, but we've also had
to keep a close eye on the labor
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markets, inflation, the Fed and
its cutting of rates, and much
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more. A pleasure to have joining
us once again to talk over the
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year, Jeremy Siegel, Wharton,
Emeritus Professor of Finance.
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Hi, Jeremy, how are you today?
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I'm good. Thank you, Dan.
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- Always a pleasure to talk
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to you at the end of the year,
and kind of look back and look
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ahead. How do you view 2024 for
the markets and finance, for
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finance in general?
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Well, we've had two really
fantastic stock market years.
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Exceeded my expectation this
year, another 20% plus gain on
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top of what we had in 2023. I
expect it to be more muted next
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year. And I'm thinking that I
see equities of lean zero to 10%. I
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think there's going to be some
cool off on the tech. A fantastic
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run. Now I don't say that with—
you know, I'm not going to bet
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my life on that, because the
trend is so strong, the
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narrative is still strong. Tech
still is outperforming. AI is
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still strong. But there seems to
be possibilities of more
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competition and some slowdown in
that area next year.
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I was going to ask you, what do
you think are those dynamics at
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play, then, that might lead to a
little lower returns?
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Well, I think there's a number
of things. Is AI being adopted
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as fast as people believe?
There's been some articles that
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some firms have been
disappointed in some of the
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results. Is there going to be
competition for Nvidia, their
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Blackwell chips? You know, we
have some, you know, some
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pushback from China and, of
course, all this is on top
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of the big uncertainties of
President-elect Trump's tariffs
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and immigration policy.
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The deregulatory side. Let me
ask you about that, because that
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obviously is— is an area that a
lot of businesses are focusing
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on. It's almost, it feels like
assumed that we're going to, you
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know, almost take the cover off
the top of this and ease things
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where businesses will have a
greater opportunity to be able
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to make some of the moves that
they believe they need to make.
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Yeah. And, you know, it's interesting,
because we— you know, we just,
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we have a monthly NFIB, which is
National Federation of Independent
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Businesses, sentiment indicator.
And I was looking back eight
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years ago, and it recorded two—
I mean, after Trump was elected,
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two huge jumps. I think, some of
the biggest jumps in history.
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And indeed, another big jump. So
those are small business,
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independent business, medium
sized business, who are, you
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know, feel that they could be
burdened by this regulation.
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They are very optimistic. Now,
there were a lot of
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deregulations taking place
during Trump's first term. I
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can't say for certainty, you
know, how many might have been
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reversed during the Biden
presidency. But clearly, I think
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people are saying, "Hey, you know
what? Things were pretty good
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for those smaller businesses
during Trump's first term," and
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they're— they're hoping for a
repeat in 2025 and 2026.
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You mentioned the tariffs. That
obviously will be an important
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component. President-elect Trump has
already talked about the
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potential of tariffs for Canada
and Mexico and China. The
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question, I guess that's out
there, and probably you're
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wondering it just as much as
everybody else is, is this truly
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going to be a negotiating tool,
or is he bound and determined to
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enact tariffs on these countries?
- Well, I think
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it— well, you know, started as a
negotiating tool. You know, the
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the bottom line, both with this
and the immigration is, nobody
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knows. I mean, you know, just a
week ago, you know, we had a big
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interview. Jay Powell on the Fed.
And he was asked the same
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questions, and he said, "There is
no way we act preemptively."
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Nobody knows what actual tariffs
are going to be. No one really
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knows what exactly the
immigration policy is going to
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be. It's really wait and see.
Those are two big uncertainties.
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But if we take, you know, the
experience of the first term,
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where he also threatened
tariffs and did institute some—
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which, by the way, most of them
were kept on, as we know, by the
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Biden administration. I regard
it still mostly as a negotiating
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tool. He loves to come in with a
very strong position and
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negotiate down from— from there.
So.
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And he has to be aware that—
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of the inflationary consequences
and the consequences on
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businesses. Remember, he is the
most outspokenly pro-stock-
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market President we have ever
had, who measures his success as
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a President against— as— one of
the major factors is how well
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does the stock market do? So I
think the financial markets are
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going to have a lot of say. They
could give the thumbs down on
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some of his— some of his
policies. I'm not going to say
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some might hurt some firms and
help others. We know that as a
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mix. But it would be surprising
to me if he pursued policies
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that were highly detrimental to
the economy, because that would
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be reflected right away in the
stock market
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Right. And so we've seen this
past year—earlier this year, we
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saw the Dow cross 40,000. This
month, we've seen the NASDAQ
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cross 20,000. When you talk
about things maybe cooling a
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little bit, you're not really
talking about a correction, but
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maybe just a little bit of a
slowing of the tremendous pace
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we've seen the last two years.
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Yeah, that's my medium forecast. But
as we all know, Dan the— you know,
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the one— one year, as we say,
standard error stock market
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returns is 20%. It means that you
know, it— you know, it could be up
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20, down, or zero, up 10, down
10, or even more extreme than
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that, you know. It is so hard to
predict on a one year. But with
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valuations being— for the entire
market on the high side. I don't
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think they're crazy. And I
think, as I've often said, the
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tech firms, the Mag Seven, have
brought home the bacon. They
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produced earnings growth of 25,
30%. But they're 1/3 of the
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market. I could see them
cooling in 2025 to maybe be flat
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on the whole, and that would
give the other 493 stocks
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a chance to to shine. They're
selling at a much more
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reasonable price earnings ratio,
18 to 20. And the smaller stocks,
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even below that. But we know the
S&P as a market is selling at
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22 times earnings. Now, it was
higher in 2000, and I think the
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equilibrium should be around 20.
So it's within the range of
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equilibrium. But clearly,
valuation as a whole is not
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going to be the accelerator of
the market, taken broadly, which
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include all those tech stocks.
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Let me switch gears a little bit
and talk about the Federal
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Reserve, which you know, as we
get ready to end the year, the
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Fed has made a couple of cuts.
The expectation for 2025 is
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what, in your opinion?
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Very few cuts. I mean, I
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believe that they, you know,
will make a cut
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on their December 18 meeting. It
will be a hawkish cut, which
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means they will cut but then say
they're in for a pause and
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awaiting the uncertainties of
the new Trump administration to
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resolve, as well as the
direction of inflation. I do not
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project another cut in
January. And in fact, my— my
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belief is, you know, we may— if
we have another cut now, we'll
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get down to around four and a
quarter. My feeling is maybe
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only 50 basis points cut next
year. So we're going to be three
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and a half, 3 3/4
on the Fed funds rate.
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And this is far higher than the
Fed's own long term estimate,
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and actually higher than their
estimate that they gave in their
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September FOMC meeting.
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Right. Wasn't it the projection
of closer to like three to three
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and a quarter percent, or maybe
even a touch lower than that, as
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the expectation of what
that target—
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The expectation in September, their
long run was 2.9, actually. I
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expect on the December 18
meeting that they will be
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raising that to 3.0 or
3.1. They're a little
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lagged and slow sometimes in
that. My personal belief is
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that we're going to be— the real
what's called our star, or
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natural rate under a 2%
inflation, given the stimulus to
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the economy, the deficits, the
uncertainty is really probably
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between three and a half and 4%.
So I'm 60 to 100 basis points
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higher than the Fed's September
call on that. So— and that means,
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of course, that long term bonds,
if we really towards a
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normalization of the interest
rate structure, of course, which
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Fed Chief Powell has termed
"recalibration". Remember that
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under normal circumstances, long
term interest rates are above
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short term interest rates. And
in fact, in non-recessionary
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times by anywhere from 100 to
150 basis points. So if I think
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that, you know, we're only— you can
get the Fed funds rate down to
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three and a half percent. That
means we'll see the 10-year at
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four and a half to five, or
potentially even a little
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higher. And that is certainly
higher than it is today.
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There's a component of, and you
mentioned this earlier, of the
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geopolitical that probably has
to come into play here as well,
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not only with what we've seen
play out in Ukraine, but
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obviously in the Middle East,
and the potential concerns with
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China as well. Those all have to
be factored in when we're
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looking into the— into the next
12 to 18 months, don't they?
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Oh, absolutely. So
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in addition to tariff policy,
in addition to immigration
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policy, we have the potential of
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agreements. You know,
President Trump has
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said that he will enter the
negotiations immediately on the
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Ukraine and on Gaza. And by the
way, it seems like geopolitical
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developments in both places, and
particularly in the Mideast,
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with what has happened in Syria,
might make the time right for a
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deal on both those fronts. That
would take out a lot of
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uncertainty. It's far from a done
deal, and, you know, things could
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spiral out of control, rather
than in control. I think the
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markets, by continuing to be
strong in that, are actually
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hoping for settlements in those
two troubled areas. Now, of
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course, there's that ongoing
threat potential of China
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against Taiwan. It's not, you
know, anything, of course,
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a shooting war as we have in the
Mid East or Ukraine, but
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certainly a big potential. You
know, Chair— Chairman Xi in China
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and President Trump might try to
get together to clarify that
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status. But that is— is also
very, very uncertain. I mean,
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again, fortunately, we don't
have a shooting war in— in—
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in Asia yet.
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We've talked about a lot here in
the last 15 minutes. As you go
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into 2025, anything else that
you are very watchful of as we
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head into the new year?
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Well, I'm always watchful. I
think of cyber security. I think
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there are a lot of bad actors,
state wise, state sponsored and
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elsewhere. You know, some— I'm
often asked the question
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"Professor Siegel, what keeps you
up at night?" And I said, "Well, I
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do actually sleep fairly well,
but I'll tell you, I wouldn't
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like to wake up in the morning
and try to get access to my bank
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accounts and brokerage accounts
and find they're all locked out.
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And it's not just me, but it's a
nationwide phenomenon." And that
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could throw the world into
chaos. But we have to consider cyber
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security as important as our
military preparedness, on— and
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spend a lot of resources to make
sure that that's there. We
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also, of course, have potentials
on the grid. Will it be
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strained? We know the power
requirements of AI are strong,
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and there's a lot of people
working on that question, trying
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to provide more energy. That's
one reason why utilities have
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actually done fairly well over
the last year or year and a
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half. But I think those are two
other areas where we certainly
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need to spend resources if we
are to realize the potential
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gains from artificial
intelligence.
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Jeremy, always a pleasure to
talk with you. And again, I look
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forward to chatting with you as
2025 rolls on. Thanks again.
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I'm— I'm— I'm here for you,
and
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I'm sure we'll talk again later.
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Thank you.
- You— you got it.
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Jeremy Siegel, Wharton
Emeritus Professor of Finance.
