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Category: Finance Insights
Tags: cybersecurityfinancegeopoliticsmarketsregulation
Entities: CanadaChinaDan LoneyDonald TrumpFederal ReserveJay PowellJeremy SiegelMexicoMiddle EastNational Federation of Independent BusinessesNvidiaTaiwanUkraineXi Jinping
00:00
Dan Loney: Well, the markets have had a pretty good run towards the end of the year here in 2024. Part of that could be tied to an expected deregulatory approach by the incoming President in Donald Trump, but we've also had to keep a close eye on the labor markets, inflation, the Fed and its cutting of rates, and much
00:17
more. A pleasure to have joining us once again to talk over the year, Jeremy Siegel, Wharton, Emeritus Professor of Finance.
Hi, Jeremy, how are you today? I'm good.
Thank you, Dan. - Always a pleasure to talk to you at the end of the year, and kind of look back and look ahead.
How do you view 2024 for the markets and finance, for
00:36
finance in general? Well, we've had two really fantastic stock market years.
Exceeded my expectation this year, another 20% plus gain on top of what we had in 2023. I expect it to be more muted next
00:56
year. And I'm thinking that I see equities of lean zero to 10%.
I think there's going to be some cool off on the tech. A fantastic
01:11
run. Now I don't say that with— you know, I'm not going to bet my life on that, because the trend is so strong, the narrative is still strong.
Tech still is outperforming. AI is
01:26
still strong. But there seems to be possibilities of more competition and some slowdown in that area next year.
I was going to ask you, what do you think are those dynamics at play, then, that might lead to a little lower returns?
01:43
Well, I think there's a number of things. Is AI being adopted as fast as people believe? There's been some articles that some firms have been disappointed in some of the results.
Is there going to be competition for Nvidia, their
02:00
Blackwell chips? You know, we have some, you know, some pushback from China and, of course, all this is on top of the big uncertainties of President-elect Trump's tariffs
02:21
and immigration policy. The deregulatory side.
Let me ask you about that, because that obviously is— is an area that a lot of businesses are focusing on. It's almost, it feels like assumed that we're going to, you
02:37
know, almost take the cover off the top of this and ease things where businesses will have a greater opportunity to be able to make some of the moves that they believe they need to make. Yeah.
And, you know, it's interesting, because we— you know, we just,
02:53
we have a monthly NFIB, which is National Federation of Independent Businesses, sentiment indicator. And I was looking back eight years ago, and it recorded two— I mean, after Trump was elected, two huge jumps. I think, some of the biggest jumps in history.
03:11
And indeed, another big jump. So those are small business, independent business, medium sized business, who are, you know, feel that they could be burdened by this regulation.
They are very optimistic. Now, there were a lot of
03:28
deregulations taking place during Trump's first term. I can't say for certainty, you know, how many might have been reversed during the Biden presidency.
But clearly, I think people are saying, "Hey, you know what? Things were pretty good
03:46
for those smaller businesses during Trump's first term," and they're— they're hoping for a repeat in 2025 and 2026. You mentioned the tariffs.
That obviously will be an important component. President-elect Trump has already talked about the
04:02
potential of tariffs for Canada and Mexico and China. The question, I guess that's out there, and probably you're wondering it just as much as everybody else is, is this truly going to be a negotiating tool, or is he bound and determined to
04:19
enact tariffs on these countries? - Well, I think it— well, you know, started as a negotiating tool.
You know, the the bottom line, both with this and the immigration is, nobody knows. I mean, you know, just a week ago, you know, we had a big
04:35
interview. Jay Powell on the Fed. And he was asked the same questions, and he said, "There is no way we act preemptively." Nobody knows what actual tariffs are going to be.
No one really knows what exactly the immigration policy is going to
04:54
be. It's really wait and see. Those are two big uncertainties.
But if we take, you know, the experience of the first term, where he also threatened tariffs and did institute some— which, by the way, most of them were kept on, as we know, by the
05:12
Biden administration. I regard it still mostly as a negotiating tool.
He loves to come in with a very strong position and negotiate down from— from there. So.
05:31
And he has to be aware that— of the inflationary consequences and the consequences on businesses. Remember, he is the most outspokenly pro-stock- market President we have ever had, who measures his success as
05:51
a President against— as— one of the major factors is how well does the stock market do? So I think the financial markets are going to have a lot of say.
They could give the thumbs down on some of his— some of his policies. I'm not going to say
06:08
some might hurt some firms and help others. We know that as a mix.
But it would be surprising to me if he pursued policies that were highly detrimental to the economy, because that would be reflected right away in the stock market
06:24
Right. And so we've seen this past year—earlier this year, we saw the Dow cross 40,000.
This month, we've seen the NASDAQ cross 20,000. When you talk about things maybe cooling a little bit, you're not really talking about a correction, but
06:40
maybe just a little bit of a slowing of the tremendous pace we've seen the last two years. Yeah, that's my medium forecast.
But as we all know, Dan the— you know, the one— one year, as we say, standard error stock market returns is 20%. It means that you know, it— you know, it could be up
07:01
20, down, or zero, up 10, down 10, or even more extreme than that, you know. It is so hard to predict on a one year.
But with valuations being— for the entire market on the high side. I don't
07:20
think they're crazy. And I think, as I've often said, the tech firms, the Mag Seven, have brought home the bacon.
They produced earnings growth of 25, 30%. But they're 1/3 of the
07:36
market. I could see them cooling in 2025 to maybe be flat on the whole, and that would give the other 493 stocks a chance to to shine.
They're selling at a much more
07:53
reasonable price earnings ratio, 18 to 20. And the smaller stocks, even below that.
But we know the S&P as a market is selling at 22 times earnings. Now, it was higher in 2000, and I think the
08:11
equilibrium should be around 20. So it's within the range of equilibrium. But clearly, valuation as a whole is not going to be the accelerator of the market, taken broadly, which
08:29
include all those tech stocks. Let me switch gears a little bit and talk about the Federal Reserve, which you know, as we get ready to end the year, the Fed has made a couple of cuts. The expectation for 2025 is
08:45
what, in your opinion? Very few cuts.
I mean, I believe that they, you know, will make a cut on their December 18 meeting. It will be a hawkish cut, which means they will cut but then say they're in for a pause and
09:01
awaiting the uncertainties of the new Trump administration to resolve, as well as the direction of inflation. I do not project another cut in January.
And in fact, my— my
09:18
belief is, you know, we may— if we have another cut now, we'll get down to around four and a quarter. My feeling is maybe only 50 basis points cut next year.
So we're going to be three and a half, 3 3/4 on the Fed funds rate.
09:36
And this is far higher than the Fed's own long term estimate, and actually higher than their estimate that they gave in their September FOMC meeting. Right.
Wasn't it the projection of closer to like three to three
09:54
and a quarter percent, or maybe even a touch lower than that, as the expectation of what that target— The expectation in September, their long run was 2.9, actually. I expect on the December 18 meeting that they will be raising that to 3.0 or 3.1.
They're a little
10:10
lagged and slow sometimes in that. My personal belief is that we're going to be— the real what's called our star, or natural rate under a 2% inflation, given the stimulus to the economy, the deficits, the uncertainty is really probably
10:30
between three and a half and 4%. So I'm 60 to 100 basis points higher than the Fed's September call on that. So— and that means, of course, that long term bonds, if we really towards a
10:47
normalization of the interest rate structure, of course, which Fed Chief Powell has termed "recalibration". Remember that under normal circumstances, long term interest rates are above
11:03
short term interest rates. And in fact, in non-recessionary times by anywhere from 100 to 150 basis points.
So if I think that, you know, we're only— you can get the Fed funds rate down to three and a half percent. That means we'll see the 10-year at
11:21
four and a half to five, or potentially even a little higher. And that is certainly higher than it is today.
There's a component of, and you mentioned this earlier, of the geopolitical that probably has to come into play here as well,
11:39
not only with what we've seen play out in Ukraine, but obviously in the Middle East, and the potential concerns with China as well. Those all have to be factored in when we're looking into the— into the next 12 to 18 months, don't they?
Oh, absolutely. So
11:56
in addition to tariff policy, in addition to immigration policy, we have the potential of agreements. You know, President Trump has said that he will enter the negotiations immediately on the
12:15
Ukraine and on Gaza. And by the way, it seems like geopolitical developments in both places, and particularly in the Mideast, with what has happened in Syria, might make the time right for a
12:31
deal on both those fronts. That would take out a lot of uncertainty.
It's far from a done deal, and, you know, things could spiral out of control, rather than in control. I think the markets, by continuing to be strong in that, are actually
12:49
hoping for settlements in those two troubled areas. Now, of course, there's that ongoing threat potential of China against Taiwan.
It's not, you know, anything, of course,
13:06
a shooting war as we have in the Mid East or Ukraine, but certainly a big potential. You know, Chair— Chairman Xi in China and President Trump might try to get together to clarify that
13:24
status. But that is— is also very, very uncertain.
I mean, again, fortunately, we don't have a shooting war in— in— in Asia yet. We've talked about a lot here in the last 15 minutes.
As you go
13:42
into 2025, anything else that you are very watchful of as we head into the new year? Well, I'm always watchful.
I think of cyber security. I think
13:57
there are a lot of bad actors, state wise, state sponsored and elsewhere. You know, some— I'm often asked the question "Professor Siegel, what keeps you up at night?" And I said, "Well, I do actually sleep fairly well, but I'll tell you, I wouldn't
14:15
like to wake up in the morning and try to get access to my bank accounts and brokerage accounts and find they're all locked out. And it's not just me, but it's a nationwide phenomenon." And that could throw the world into chaos.
But we have to consider cyber
14:30
security as important as our military preparedness, on— and spend a lot of resources to make sure that that's there. We also, of course, have potentials on the grid.
Will it be
14:47
strained? We know the power requirements of AI are strong, and there's a lot of people working on that question, trying to provide more energy.
That's one reason why utilities have actually done fairly well over the last year or year and a
15:04
half. But I think those are two other areas where we certainly need to spend resources if we are to realize the potential gains from artificial intelligence.
Jeremy, always a pleasure to talk with you. And again, I look
15:20
forward to chatting with you as 2025 rolls on. Thanks again.
I'm— I'm— I'm here for you, and I'm sure we'll talk again later. Thank you.
- You— you got it. Jeremy Siegel, Wharton Emeritus Professor of Finance.