Professor Siegel On The Markets

June 8, 2020

Professor Jeremy Siegel, WisdomTree’s Senior Investment Strategy Advisor and Professor of Finance at Wharton, provides his perspective on the current market and how to prepare for the Coronavirus aftermath.

Jaclyn Roberts: Hello, everyone. Thank you for joining the WisdomTree weekly call with Professor Siegel. Please visit our website,, for additional insights, including the recordings of these calls. Today, Professor Siegel will provide a quick 15-minute update, and then we will open the lines for your questions. Please note that this call is being recorded. If you need assistance, dial star zero, and operator will be happy to assist you. With that, I will hand the line to Professor Siegel.


Professor Siegel: Well, thank you very much. Just exactly at 4:00 PM, a headline scrolled across Bloomberg that the S&P has wiped out its entire loss of the year. This has been the fastest bearer bond market in history, seemingly confounding a lot of people, but not our listeners here. If you've been on the calls for the last two months, you know why this is happening. I got a call on Friday, after the market was rallied, after the employment report, and they said, "Dr. Siegel, we need you on again. You've been the best forecaster in 2020." Well, listen. I've been around long enough to be humbled. Never toot your horn on that. But the important thing is that it's good economics behind this.


Let me just repeat the economics behind this very briefly. I know there's always a few newcomers to the call. The flood of liquidity provided by the Fed was unprecedented, and far in excess to the financial crisis. I've never seen anything like it in ... I won't say in history, but it is coming close. That liquidity has to find a home. And that home is going to be, in the short run, and in the medium run, equities. And as I predict inflation next year, with all that debt, and all that money. A huge build-up of purchasing power in the hands of Americans.


By the way, I'm not taking a victory lap on that employment report. People said, "Aren't you thrilled about that?" I'm not, really. I mean, I don't care. All that is rear-view-mirror stuff. The important thing is to look at the liquidity in the Fed, and the developments on the virus front. Don't forget, a person is unemployed when he or she says, "I am actively looking for work. Not that I'm not working, but I am now actively look ... I could have been furloughed, but I'm living off of a pretty good stipend now, so right now, I'm not actively looking for work. I'm not unemployed." I just want people to know what that statistic means. There's been a lot of debate about what it means, and people are parsing it through, I don't really even care, any of that.


Yeah, did feel a little bit better than one would expect, but again, it's backward looking. It's not really understanding, it's not dealing with the dynamics going forward. All those huge pessimists ... I know Miller was on with a mea culpa this morning. I don't know, I was so bearish, implying that he's never been more wrong in his life. We had David Tepper, great investor, also totally wrong. Did Buffet sell his airlines? Should you have done that?


Well, again, it's, why were they wrong? And again, we have to say that the chapter isn't totally over yet. Nonetheless, it's because again, they didn't look at the monetary statistics, which are so powerful in driving it. Mohammed El-Erian, who was also very pessimistic and very doubtful of that, finally caved in and said, "Well, the Fed is providing a put on the market, and that put is ..." He said, "distorting the market." That's not true. It's not distorting the market. It's just a huge amount of liquidity that's been added.


As I said, the bill for COVID-19, the three trillion dollars of the CARES Act and the Fed stimulus, will eventually be paid by the bond holder. Did you see what happened to the ten-year on Friday? Over 90 days, again, extremely low. This is the beginning. Again, the 40-year bull market in bonds is over. On the virus front, yeah, it's simmering around ... The virus, actually interesting, worldwide cases going up, but deaths going down. This is true in many countries and many states. And there's basically three reasons for that.


So, you talk about new cases, but the deaths are going down. First of all, there's always a little bit of lag that's involved, but also the fact ... There's several things. First of all, it already swept through some of the most vulnerable communities in the elderly and the nursing homes. And those mortality rates were very, very high. So people who are getting it are not as sick.


Secondly, more people are getting tested. Well, more people getting tested, you're going to have more people that obviously will test positive for the virus. And third is, we know how to treat them better. Even with very limited therapeutics now, in the sense of new therapeutic, being the only one, they know how to take precautions now. They may have already reduced the fatality rate by 50%, just in understanding how to treat people that are sick. All these advances without a vaccine or effective therapeutics, which then are already in stage two and stage three, coming up. Again, we all saw videos in Vegas, of the re-openings of the casino and the crowds. And it'd be very interesting whether there is a spike of cases. What I would love to do, and I don't understand why the airline and CDC is not doing that is, everyone that is traveling in airlines, and we do know that airline traffic is up from abysmally low to terribly low levels. From down 95% to down 88%. Why don't we track all these people? How many are actually catching it? Or has wearing masks been effective?


Nothing will gain confidence more than a study that shows with people that are flying are not getting sick. Or people that are going to the casinos are not getting sick at any greater number. I would like to see that definitely into that.


We've talked about this before, but it is something that does have to be considered. We are less than five months away from the national elections, presidential. The pollings for the Republicans are looking the worst ever. What is concerning, and I've talked about this many times, is, it's not just the presidency, which is also in the betting markets, the worst ever, for the ... Well, the worst 10 years for the Republicans. But the senate. The Democrat contenders are pulling extremely strongly. Even correcting for biases. And for the first time since I've been looking at the betting markets right now, it's 56% that senate will be taken over by the Republicans. Excuse me, by the Democrats, excuse me, 47.


Now, that's still very close to a flip, 56-47. It doesn't add up because of how they compute it. But just to give you an example, before COVID, it was 70-30. And even times when Trump was pulling even lower than now, the senate was still 70-30 Republicans. One has to consider that if the presidency and the senate go Democratic, of course then the house will of course go Democratic then. There will be huge changes.


The Biden's tax plan. Look at it. It's pretty punishing for high-income, and for a lot of capital. And let me tell you something as someone who watches this very, very closely. If there's a split 50-50 in the senate and Biden wins, so then they get the tie-breaking vote, I will guarantee you that the Democratic Biden tax plan will be enacted. All they need, a 50-50, will enact their complete program if they want. Now, there will be some compromises on certain angles, but they will push it through just as the Republicans pushed it through. They don't need any big majority whatsoever. They need 50, the Democrats need three-seat gain only. And they're leading in five on a net gain. What does this mean?


Well, look at the tax plan. Now, before you all get scared and say, "Oh, my God, what happened?" Let me just tell you that the stimulus that's provided by the Fed and others is more powerful than the Democratic tax plan at trying to stamp out the gains on equities. The biggest is that Biden wants to increase the corporate tax rate to 28%. Now, that's still lower than 35, but up from 21, and take out a lot of the other benefits that were thrown in. It amounts to 1.4 trillion dollars over a 10-year period of profits, wiped out by the tax plan.


And we're not even talking about taking away all privileges for millionaires or higher. On any capital gain, if that would be the case, it would be the first time in history, long term capital gains would not have a preference of lower rate. And all favorable rates on dividends, again, over a million. So upper middle-income will still get a break. The very rich won't get a break. I won't go through all the other taxes on the very rich, but I will also say that the Democrats, if they have just 50 votes, can do it completely. Completely.


The only good thing for those people here in New York and the high states, you'll probably get your state and local taxes. Although they're going to be limiting also ... Deductions will be limited to a 28% limit, at least on this form.


Now, again, there's going to be juggling around, but don't think that with a 50-50, oh yeah, there won't be really much done. With a 50-50, there'll be a lot done. If the Republicans have 51, nothing will be done. This is an all or nothing on a one-senator difference. I just want you to keep in mind that as we go into the November elections, which are less than five months away at the present time, again, I've heard some people saying, "Oh, that's not factored in, and there are the bears," and all that.


Again, the stimulus provided in my sense, will continue even through that. But when election day comes, if the Dems prevail in the senate, you're going to get a hit. You're going to get a hit, and it's a rational hit. You could get a 5% drop, 5, 6% drop. But the stimulus will still be provided. And the lobbyist will come in. Biden will go with the basic plan, but there'll be some loopholes that will be gotten in that will make it a little bit better. Basically, that plan could really completely go through on the election. That is a risk going forward.


Probably a greater risk to the market than a flare up of the virus, which now everyone says, even if it flares up, we're going to try to control it domestically, we just won't have the lockdown that we had before. If we have a flare-up of the virus, we'll even throw more money at the economy. And again, more money at the economy is basically going to be okay for equities going forward.


So, I'm still bullish on equities, I still think this rally has a way to go. Obviously, the ... Once the S&P hits an all-time high, as we know, the NASDAQ. The Democrats are saying, "Look, the rich are even profiting more as the rest of the people are unemployed and in financial distress." And that will just gain the momentum to the rich, which could be a reality. But again, economics and liquidity will actually be a major factor that will, I think, definitely still drive equities. We also saw a big increase in Europe. Emerging markets is improving and Europe is improving. Europe is down 10% in dowers, 9% in dowers, and of course the S&P is now flat in the US.


So, it caught up dramatically from where it was. As I mentioned, the major themes that I have is that the economy will continue to improve, this is going to be basically good for equities, but we will have inflation in 2021. We got to watch out for long-term bond prices rising, particularly treasury bonds. They're going to be the most valuable, because they're the ones that were driven down the most as hedges. They're the favorite hedge asset for so many investors.

Operator: So, everyone, if you wish to ask a question, people's key star, then one on your device. If you then decide to withdraw your question, simply key star, two. All questions will be answered in the order received, and you will be advised when to ask your question. All other lines will remain on listen only.


And we have our first question. The first one is coming from Timothy Davis. Please go ahead.


Timothy Davis: Thank you very much Professor Siegel, for that update. This is, as always, very informative, insightful, and certainly not boring. In regards to the unemployment rate, and the unemployment numbers on Friday, that's got to be pretty much the biggest miss I've ever seen in economic forecasts made in 22 years in the business. And now you've got these conspiracy theories flying from the Washington Post, I believe, and some other outlets, is, were the numbers right? Were the numbers wrong? And I have not had a chance to really dive into that myself, but have you had a chance to look at that, in terms of what might have thrown us off, and what exactly happened on Friday?


Professor Siegel: Well, yeah, it was the biggest miss. Wow, there's a lot. First of all, let me tell you that the statisticians at the bureau of economic analysis, I know a number of them. I think they're the highest independent quality. They've always been not bending to political pressures on getting objective data back, going all the back to when GDPs were first. 1947. I mean, I believe the data. What I question is the difficulties in interpreting the data this time. For two reasons. First of all, getting a hold of people, they said that the answer rate was lower than usual. Sometimes they would have actual field people go out, meeting these people, and it all had to be done by telephone, so they were not getting the coverage. But most important thing is, what I just had mentioned, was the fact that a person is unemployed when he or she says they are actively looking for work. Not when they're not working.


So, the unemployment rate went down. Because people could say, "Well, I'm not working, but I'm not waiting now. I'm waiting to build background, or I'm enjoying my $600 bonus on my unemployment. I'm going to wait for another six months or eight months." Now, the payroll numbers don't have that difficulty. However, the problem is the question of part-time versus full-time, versus furloughed, versus not. There's a question of identification there. So, Trump made a big deal press conference, and now his new ads are incorporating the economy is roaring back.


I know, we're going to have a strong comeback, but so many of these unemployment people are not going back to the same work. They're going to have to be retrained and repositioned. I think unemployment is going to be really high on election day. So, this one month, we could go into what those numbers mean. Honestly, it's going to stay really high. I think we're ... Again, by November, we should know about whether there's a second wave or not. And I said weeks ago, that no second wave does favor Trump. Because he's been a champion of reopening economy. So that would push him into a favorable position, no matter what the unemployment rate. Again, basically, hospitality has tipped up, but from unbelievably low levels. And always, the most fearless people are going to be barging into the casinos and going first to the restaurants, and they're the fearless ones. But we do know from all the polls, there's many others that are stepping back.


I myself said, when asked, am I going on a plane, I'm saying, "I want to see a study about what kind of infection rate. If I get some good data there, yes, I'm willing to go. In fact, my priors are, I think it is pretty safe with protection." But again, that's going to be really cautious. Yeah, they're going to make a big deal about whether the numbers are right or not, because they're always hard to interpret. But my feeling is, all that is going to wash out by the election day. So what you're going to be left with on election day is, people will look back at this Trump administration and say, "Do I want to repeat it again?"


And of course, we have the debates that are going to go on. Trump is a known factor. Biden, how will he do being under the pressure and all that? So, there's a lot of uncertainties still in this presidential election going forward. But I do not think there's a conspiracy, I do not think political pressure was put in to make those numbers look good. It would be actually stupid to do it now in June. I mean, if you want to make the numbers look good, you want to do that a week before the election, because that's when the data will have the most impact. Not now.


So, I think they are right, however, it's very hard to interpret exactly what that means. It doesn't mean the economy is roaring back, and it's always still looking at the rear-view mirror. And you want to look forward, you look at the virus, you look at the success of the re-openings. That is much important data. Everyone's reopening. Vegas was reopened, Orlando is reopening. The numbers on cases two and three weeks from now are going to be far more important than that Friday employment report, in my opinion.


Thank you. Next question.


Operator: The next question is coming from Doc Darilek. Please go ahead, your line is open.


Doc Darilek: Hi, professor. Question related to your earlier comments on the election. Just speculating, assuming let's say the Democrats take the house and the presidency and have that power. They're generally known for more spending than not. Is it too much to assume ... Entitlements don't get reduced, that's too much of a hot potato. Is it too much to assume more reason for protection in the portfolio, in light of pro-inflation, gold, et cetera?


Because of the great debt we have, and we carried on, and then probably more ... I'm trying to see, is that too much to reach the conclusion-


Professor Siegel: Generally, the history is, the Democrats are softer on inflation than the Republicans, honestly. And again, as I said way back in March, when I was looking at that, I said the inflation is going to run above target, and the Fed is just, with unemployment still at maybe 10%, 9%, they're going to let it run above target. They're going to keep the short-term rates lower. Long-term bondholders are going to slowly try to start protecting themselves against inflation. You're going to see that long-term bond rate rise from 90 basis points to 100, to 120, to 140.


There'll be some pressure for the Fed to rise, but they will keep it low to keep the economy going strong. And if the Democrats ... So, they're going to raise taxes on the rich by two to three trillion. You're can make sure that the spending that their plans are going to do is going to be at least that much. So that money is coming back. That's not going to be a net gain. And they're not going to push on the Fed to stop it. Who does the inflation hurt? Inflation will only hurt the bondholders.


And all those rich guys, they can absorb a little bit. They have 40 years of a bull market. So they're not going to care that much. And if you go through history, that's—Democrats, softer on inflation, Republicans, harder on inflation. Only because there's the lenders and the bondholder, and they want to represent the purchasing power. It falls pretty much into the way that you would think. But yeah. I mean, actually, a Democratic victory will get a hit to your equites. So, I'm just telling you that a sweep of the Democrats will be a short-term hit on equities. But long-term, the spending and the liquidity on the Fed will still make them the best assets by far. I'm just giving you a short-term warning there.


Doc Darilek: Well, thank you so much, and by the way, your call in the last couple months has been really good, relative to some of the more "smart" people. I have a page of folks that are really, really smart, that have been on the wrong side. So good for you on that.


Professor Siegel:

Thank you very much. Thank you.


Operator, next question.


Operator: The next question is coming from Michael Volberding. Please proceed.


Michael Volberding: Hi. Let's say that Jeremy Siegel is appointed tax structure, with the goal to reduce long-term government debt load. What do you do?


Professor Siegel: Wow. Well, okay, that's a good question. The long-term government debt load, as I've said, and many others, and there's really widespread agreement, is due to two programs. One program, the most important, Medicare obligations. And the second, social security. Medicare is 70 to 80% of the reason why our long-term debt ratios will go up and social security is another 20. Everything else is—we 're almost balanced on that. And by the way, that's been true for 10 years. That's the true pre-COVID and post ... The thing is, COVID's added another three to four trillion on the debt. And that's why I think with the liquidity, you can boil up inflation a bit. That actually reduces that ratios, because remember debt is nominal debt versus nominal GDP.


So, prices rise, nominal GDP will rise, but the debt ... Only tips. Tips will be immune for that. Although I still think they will not do ... I mean, if you want to take a spread between tips and the standard nominal, I can understand that, but I think equities will definitely beat tips. Tips will definitely beat the nominal bonds. But going back to your original question, those are the two entitlements. And that was a standard Republican, as we all know. They said we have to work on them. Trump threw that aside. Working on them, there was never a popular position.


And let me repeat what I've been saying for 10 years, since the financial crisis started and all this debt. They said, "When are we going to take care of our deficit?" And I said, "You're not going to take care of your deficit until interest rates rise enough so that people start saying, "Ouch, ouch, ouch." The homeowner, and the borrower, and the borrowing costs." Now, in my scenario, long-term interest rates are going to grow up. But what are they going to do? They're going to go to one and a half to two and a half, three. That's still historically low. Three and a half, four, four and a half, five, then you're getting in the mortgage rates that are a little bit touchy. The Fed is going to keep that short-term rate really low.


So, all those borrowing rates, linked to LIBOR and all that, are going to stay low. But the long and ... It's going to go up. And then finally, home builders are going to start complaining, and the people will say, "What's the solution?" Well, the bondholders are saying, "There's just too much debt coming out for us to really absorb it at a better price." Listen. Let's see what happens ... Reagan had a huge tax cut. Caused a big deficit. And there was a lot of good things about that tax cut. But it caused too big a deficit. Bonds reacted negatively. He had to backtrack. Republicans, they bring it down. Bush, it was the same thing.


So, until the bondholders back up, that's the only time you'll get the political pressure to take actions. And by the way, actions to solve the Medicare and the social security, although one of ... By the way, one of ... Biden wants to have the 12.4% the social security applied to everything over 400,000. As you know, there's now a cap of 137,000. So he's going to keep the cap at 137 to 400, there will be no social security, and then at 400, it goes back to a 12.4% surcharge on your income tax, which is also going to go up 12.4%. Now, don't forget, the Democrats have, for years, been advocating, "Uncap the social security tax." Which of course would be the sharpest post-war tax rise on the rich, ever, in terms of rates, that we've had. But that's his proposal.


And let me just say, I say that if there's a Democratic sweep, I think there's a very good chance that proposal will be in there. That's on social security. And a lot of the other Medicare and all the other spending that's going to keep on going on. The other programs will also do that. The political pressure on actually reducing the deficit comes from rising interest rates that really squeeze the ordinary American, which is the homeowner and the borrower. We're nowhere near that, and I don't even see that in 2021, despite our prediction that interest rates are going to be rising. Thank you.


Next question.


Operator: The next question is coming from Jonathan Elks. Please proceed.


Jonathan Elks: Good afternoon, professor. Again, thank you for your input. I was wondering if you could just tell me what your view are with some of the major economies like Japan, Germany, UK and France, and where do you see any upside in those economies, or who do you think will do the best?


Professor Siegel: Well, I'm not as much of an expert on all those foreign economies as Japan, actually, Jeremy Schwartz has spoken on that. The Japanese market. Listen, I like the stimulus program. Obviously, the market loves the new stimulus program. The ECB has announced two weeks ago, we really get a rise there. We're also getting a full on the dollar, recently, by the way, which is also good for the United States stocks, as far as they're concerned.


I think that emerging markets are still underpriced. And if the scenario of the moderate inflation, which helps them first of all reduce dower debt, and secondly, because of a lot of ... Not all commodities are going to inflate, and I'm not predicting a 1980s type of really massive inflation in general commodity prices, but I think the firming up of commodity prices that results from all the dower liquidity that's going to come up is going to help a lot of those also emerging markets.


There's also going to be China. We haven't talked about that. The tilt away from China is going to help some of the emerging markets, and hurt China, but China's economy is about the size of our economy right now, so they're big enough that they don't just need exports anymore to do well. But I think that a lot of the supply chains will move to India, they'll move to Southeast Asia, they could be moving elsewhere. Thank you.


Jeremy, do you want any final statements, or observations?


Jeremy Schwartz: Thanks everybody for listening to this call, and we look forward to talking to you again next week.

Professor Siegel: Thank you, Jeremy. So, operator, you can end our call for this week.


Operator: Thank you so much, everyone. This concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.