Wharton professor Jeremy Siegel says stocks will rise 20% next year as inflation tapers — but legendary investor Bill Ackman says not so quickly
In the meeting room at lucky 500 Companies, in the glitzy bars of Wall Street and in the halls of business schools across the country, had a consistent debate about “what’s next?” US inflation in the past year.
In recent months, a The chorus is developing Economists and business leaders have made the point that the scourge of sky-high consumer prices is coming to an end. But one private group of similarly seasoned economic minds who believe that history shows that inflation will not be easily tamed.
The arguments of Wharton Professor Jeremy Siegel and billionaire hedge fund manager Bill Ackman over the past week testify to these opposing opinions.
Siegel said on Monday that he believes the Fed’s six rate hikes this year have brought down inflation, and the data has yet to show that.
“I think basically 90% of our inflation is gone,” he said told CNBCpoint at housing market slows down as evidence.
But Bill Ackman, founder and CEO of Pershing Square Capital, just last week said he believes inflation is far from under control.
“We think inflation will be structurally higher going forward than it has been in the past,” he said in an interview. November 17 earnings call with investors, arguing that trends such as de-globalization and a clean economy energy The transition will lead to sustained cost increases.
Ackman and Siegel are serious contenders in the high-risk inflation debate, and who is right can decide everything from the value of your 401(k) fund to how much you pay for your mortgage. mine. Here’s a look at their argument.
Ackman’s structural inflation and equity risk
Inflation, as measured by the consumer price index (CPI), increased 7.7% from a year ago in October. While it is much lower the highest 9.1% seen in June, it’s a far cry from the Fed’s 2% target rate.
Many hawks economists and business leaders argue that even after this year’s aggressive rate hikes, the Fed still has a lot of work to do to get real inflation under control. And Bill Ackman believes they may not reach 2% at all.
“We do not believe it is likely that the Federal Reserve will be able to bring inflation back to a steady 2% level,” he told investors last week.
The hedge funder went on to explain that there are long-term structural changes to the global economy such as wage increases, the clean energy transition, and de-globalization that will increase the costs of companies and cause inflation will increase in the coming years.
In particular, Ackman argues that ashore—relocation of former foreign business operations back to the United States—possibly increased labor and material costs for American companies and increase inflation.
“Ultimately, we will have to accept the higher levels of inflation associated with de-globalization,” he said. “We strongly believe in the argument that there will be more businesses closer to home and it will be more expensive to do business here.”
Since these long-term structural changes will exacerbate inflation, Ackman believes the Fed will have to stick with raising rates. But he explained that these rising interest rates will only push longer-term bond yields higher, which is “a risk to equities.”
Siegel’s Shelter Deflation and Stocks Soar
Siegel and many more dovish economists like him argue that the worst of inflation is over.
They point to the fact that shelter price accounts for about a third of CPI, one of the most popular measures of inflation, and note that the housing market is slowing.
Current 28 housing markets once red hot where home prices have fallen 5% or more from a year ago and mortgage applications is down 41% in the same time period.
Siegel said that the Fed ignored the ailing housing market because it was looking at old CPI data, which measures changes in housing prices with lagged.
“My view is housing has fallen but the way the government calculates it is so slow it will continue to show an increase,” he explained.
Professor Wharton argues that new data in the coming months, including Case-Shiller house price indexwould begin to accurately illustrate the deflation coming from the housing market, prompting the Fed to pause rate hikes.
“It’s taken too long for the Fed to understand that and they still don’t understand that inflation is essentially over, but they will, and I think they’ll get to it maybe very late this year. or early next year,” he said. “And I think as soon as they get it, you’re going to see the stock price go up.”
Siegel believes that when the Fed realizes that inflation is fading and decides to pause rate hikes or even cut rates, it will spark a 15% to 20% rally in the S&P 500.
This story was originally featured on Fortune.com
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