Webinar Replay

Not Just Another Rate Hike

February 1, 2023

During this exclusive Office Hours event, Professor Jeremy Siegel (Senior Investment Strategy Advisor, WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania), Kevin Flanagan (Head of Fixed Income Strategy, WisdomTree) and Jeremy Schwartz (Global Chief Investment Officer, WisdomTree) discuss the results of the February 1st FOMC meeting. In addition, the discussion involved thoughts on where monetary policy may be headed in the remainder of 2023.


Irene :

Hi everyone. Thank you for joining today's timely office hours discussion, titled Not Just Another Rate Hike, where you'll hear from Professor Jeremy Siegel, Senior Investment Strategy Advisor At Wisdomtree, And Emeritus Professor Of Finance At The Wharton School Of The University Of Pennsylvania, along with Kevin Flanagan, WisdomTree's Head Of Fixed Income Strategy, and Jeremy Schwartz, WisdomTree's Global Chief Investment Officer.


Kevin Flanagan:

Thanks, Irene. Good afternoon everybody. Not Just Another Rate Cut. You would think, "Ah, it's just a quarter point." But where are we going from here? I think that's what we're going to grill the professor on today. Not whether or not do we have one more, two more rate hikes here going forward. Where are we going? How long is the pause going to be? Are we going to have rate cuts? And I think that's going to be an important part of the messaging, and how the markets end up responding. And we'll talk about that, how you got, once again, this bipolar treasury market reaction, A, to the policy statement coming out at 2:00 PM Eastern time, and then PAL's remarks, and where we started and where we ended up. But before we do that, Jer, I'm going to turn it over to you. Let's throw up the three polling questions, Irene, and we'll get started here. It's not just another rate hike, remember.


Jeremy Schwartz:

Yeah, Kev, you've got these rate cuts on your mind.


Kevin Flanagan:



Jeremy Schwartz:

The rate cuts through the year, some slips there, but no, it's always been a pleasure to get the professor. He's been calling this Fed spot on, unlike others here calling for the inflation cycle. We're going to hear a lot on his views and come back with what should you do about it with Kevin on fixed income and perhaps me on some equity ideas. But professor, are you surprised by what we see in the market? Do they get the read right from Powell? He's saying they want to stay high for a while still.


Jeremy Siegel:

Well, should we have our participants chime in on their opinions first and then discuss the results?


Jeremy Schwartz:

Sure. If everybody can go to your poll question. What were you expecting from the outcome of today's fed meeting? We gave a few different options with the 25 basis point hike. And guidance for you, there are no more rate hikes. Guidance for more hikes coming. Guidance that there's could be no rate cuts for this year and some softening of prior stances on rate cuts. Do you think the Fed will cut rates later this year? No. Yes, but later than the market expects. Yes, and sooner than what the Fed is thinking. And third, will the Fed push the economy to recession? Yes, we may be in one already, or no, we're going to have a soft landing. So love to see how the audience is viewing this before we give all of our comments. And here we come.


Jeremy Siegel:

Right. Well that's interesting, I'm going to talk. So yeah, I mean, if you read the statement that second one is what he said, but if you read the markets, and also what I heard, a lot of the fourth one was in there. Do you think the Fed will cut rates later this year? I do. Most of you don't. And certainly the chairman's words were "No," but he did not rule it out completely. And on our last one, I'm going to have to scroll down a little bit to see your guys' response Yes, and maybe we're already in one. Interesting.

I don't know if we're already in one and then there's a question of whether a soft landing will be achieved, which is probably a little bit more likely than it seemed a few months ago. But these are provocative questions, so Jeremy, let me speak on them.


Jeremy Schwartz:


Jeremy Siegel:

All right. This is my take. The market was very defensively oriented, as it often is, and when the statement came out, ongoing rate hikes would be appropriate. They said, "Oh," and you saw on the statement at 2:00 PM, the markets go down. Now, when you listen to the news conference, I got the feeling, and certainly I think the market got the feeling, that everything that I've been saying for the last six to nine months is slowly sinking in to the Fed.

Now, what first sparked the rally was a question about is the market misinterpreting it. The stock market is basically up, financial conditions haven't... And he did not push against it. That was key. He did not push against four or five questions during the news conference that implied that the market is not getting it the way he did at Jackson Hole, the way he did at the December FOMC meeting. That was the big change, and that was actually the immediate turnaround, because when he started speaking and started going down more, because he basically read the statement again with a little bit more elaboration.

And then he began to talk, and the first question was, should we be concerned at the market? And he didn't say, "Oh, the stock market's getting it wrong. The bond market's getting it wrong. We're not even thinking about cutting rates." He repeated, he thought more rate increases were appropriate. He did say that, but he did not rule out, and this is the first time he did not rule out that there might be rate cuts at the end of the year. Again, not the expectation, but the possibility that there might be the rate cuts. And he emphasized the two-sided nature of the risks. In other words, well, we had our dot plot from December. In six weeks, we're going to have another dot plot and it could be different, and it's a possibility that we won't go through with two more... I mean, two more is max. And it seems, in the discussions, that they basically had.

Third, finally what I've been saying for so long, the distortion in the housing data, he basically finally acknowledged. Now we're looking at core inflation X housing. Yes, housing continues to go up, but we know it's going to go down in the future. So let's throw out that concept, which he never did before. And then he says, "We still see persistent inflation in that sector. I would like to see that sector loosen up before I stop raising rates." He also implied that part of it, although he agreed not all of it is due to labor tightness.

He seems surprised as I have, and I've voiced this in my commentary, how strong the labor market has remained. There's been no break, JOLTS data, very strong, against expectations this month. We've already talked about the unemployment... Well, we're going to get another monthly, weekly claims data tomorrow, has been under 200,000. I would not have expected that two or three months ago. I would not expect the unemployment rate to still be at the 40-year low of 3.5%. Now, we're going to have to see, ADP was a little on the soft side this morning. In two days, we'll get to Friday.

What I think would be necessary for the Fed to actually pause rates would be some crack in one of these labor market indicators, either initial jobless claims or the JOLTS data. Now, that only comes out once a month, but we are actually going to get one more before the March meeting, but particularly, we're going to get two more employment reports. Are they going to show weakness? ADP was a little weak. We'll see what kind of data we get on Friday on that. If something comes out negative or zero, there'll be a lot of talk, and that gives him cover. We finally see the labor market easing enough that the pressure on wages is taking off. Actually, I'm a little surprised. I was worried the ECI was going to come in a little bit higher than expectations and some of the wage data was going to come in a little bit higher, given the tightness in the market, but it hasn't. It hasn't.

Now, one of the big unanswered questions... I mean, if I were there in the room and would raise my hand and would ask J Powell was, you've repeated several times that monetary policy works with that lag and that a good part of the monetary policy is, I think if I'm quoting him correctly, yet to be felt. Well, if it's yet to be felt, why not pause now and see if it's felt? Again, my feeling is, if you wait until it's really felt, you may have waited too long and really precipitated a recession, which is unnecessary, given that the prices are in fact going down.

As you know, we at WisdomTree, we keep a real price index that uses real housing data. We show not just disinflation. By the way, the term disinflation has not been used by Powell very much, but he used it a couple times to describe what was happening. But you know what word he should have used? Deflation, because we've actually had declining prices over the last three months if you factor in on the ground, current housing data. Actually deflation in that. So I would've asked him, if the effect is yet to be effect, why... I don't understand the idea of keep on pushing it up until you actually see that happening, knowing that there could be another 6, 9, 12 months of even more. And then how are you going to turn the ship around?

Question number two, this is something I've been harping on for months. I didn't know why one reporter and many of those reporters are... I mean, they're very interested in the labor market and the average American worker, did not one reporter say to J Powell, the data shows that the worker has fallen 5% behind inflation since the pandemic began. Why do you want him or her to stay permanently behind inflation by saying, we don't want their wages to rise any more than two or 3%? I would've loved to ask him that question. How would he have answered that question? I'm shocked that not one reporter interested in the labor market, which affects 200 million of us, of which probably 150 million have fallen behind inflation on their wages over the last two and a half years, no one asked.

All right. No one asked in addition, nor did he respond to if there's a structural labor shift because of the pandemic, because of retirement or whatever you cause, why does the Fed have to force wages down? The Fed is never designed and has never been designed. No monetary theorists would say, "If there's a structural shift, the shortage of labor, that you should force wages down," yet wages have to rise to clear the markets. But those two questions, his last bugaboo, which is the tight labor market, two basic questions about why is pursuing the policy is remained completely unanswered.

Not withstanding, a little bit of reality is sinking into the Fed, slow, but sure. The Fed has no idea what it's going to do. They just follow the data. If the labor market data had gotten soft, you might have actually seen no increase. But I knew, when the JOLTS data came in this morning and I knew when the initial claims data came in very strong in 3.5, we saw nothing in the labor market that it would be a quarter. I was just hoping that he wouldn't go crazy and a half.

And by the way, again, no dissents. This now marks well over a year of no dissents by any FOMC official, either the Fed board, or the bank presidents. Now, board is not a voting member. He did voice several weeks ago that he wanted 50 basis points. He may have still voiced that, we don't know, he's not a voting member, but there was again, no dissents on this policy, which means that there had to be some pretty good consensus around what they are doing. Three weeks will follow the minutes. Very honestly, I'm not looking that much at the minutes because that's using old data. We're going to get three more weeks of data, more price data, more labor market data. Again, we see the loosening in the labor market, then the voices of pause will become much stronger for the Fed.


Jeremy Schwartz:

Getting a ton of questions, professor. We had a bunch pre-submitted, bunch asking live questions. Kev, do you have a first question you want to go into?


Kevin Flanagan:

Yeah, yeah, because I think we've discussed this in our own investment committee meetings. It's the time of the pause. That's kind of where we're going. I think we're reaching that end game. I think you'd agree with me, professor. We're getting close to that end game of where that Fed funds rate hikes, hikes, not cuts, hikes will come to an end, but how long will the pause be?

And what I thought was interesting, one of the comments that came across Bloomberg was they're not exploring pausing and then hiking again. So in other words, it kind of gets back to the referencing of Bullard. Bullard seems to want to get there sooner rather than later. But that whole reference of before we pause, we want to make sure we don't have to restart rate hikes again. We'll talk about rate cuts in a little bit, but I wanted to get professor your take on that.

If the Fed is thinking that and say the jobs numbers, to your point, say they come in okay. The consensus I think for payrolls is 190. Say that is right on the screws and say the next month it dials down a little bit more. Say it's 150 and they give another rate hike in March. So then does that kind of argue that they could give us two more quarter point rate hikes before the pause comes in the second half of the year?


Jeremy Siegel:

Oh, good question Kevin. I want to point out a couple of things. First of all, we're going to get a lot of price data too between now and the next six weeks. So that will also figure in to the situation. Although clearly the payroll will also. If we get 190, 150, 120 and the CPI comes in pretty much as expected, PPI as expected, we don't see any further deterioration in purchasing manager's index, which have not looked good, manufacturing, which has not looked good, durable goods, which was not good. A lot of the data is pointing to maybe one, one and half percent this quarter. Of course, we're only one month through this quarter as far as that's concerned.

But if we don't get any real loosening of the labor market and signs of definite slowing, I think another quarter point is in the cards. We should also be very... Again, a confusion that I have talked about, the Fed fund's futures are not, N-O-T, not unbiased estimates of what the Fed is going to do. Fed fund's futures are negative beta instruments, which will understate what the market thinks the Fed will do.

It's completely consistent for the market to think three more hikes, let's say, and the Fed funds don't only show two more hikes. There is no inconsistency there whatsoever, as much as it's totally beyond 95% of the financial reporters and others who don't understand that there is a built-in bias in the Fed fund's futures market towards lower than expected.

The reason, by the way, is that if there's a sudden recession or pandemic or whatever else, the Fed's going to really lower rates and risk assets are going to go way down. And these Fed funds future are going to go way up and you want to hold them as hedges. And so therefore you're going to overbid them and therefore they're going to be underestimates of the true unbiased estimates. It's finance 101.

But way beyond the Fed and way beyond anybody that asks any questions about the Fed, I don't want to talk about that. But this idea about whether the market has it right or not, a lot of people can wrongly compare the path of the dot plot to the Fed fund's futures and say, "Oh wow, the market doesn't believe the Fed." They may not. And I actually think they don't believe the Fed will get that tight.

But let me just point to you that Fed fund's futures are always below the market, always below the market expectations. I'm not saying, hey, the Fed funds usually don't always end up below what the market expects, but I'm saying it's always below in expected value sense because of the dynamics and the hedging qualities of the Fed fund's futures market. So you just use that comparison. That's sad.

Yeah, I would say that the Fed doesn't think that they're going to... I think the market doesn't think they're going to get into the 5% range. If we have another 50 basis points from here, we're at 4.33. Now we add 25 to that. And if we add another 25 to that, we got 4.83 on the Fed funds rate. Don't forget, we have a negative term structure. You take a look at, well, obviously the three-month treasury bill rate is 4.63, the 10 year is 3.56. That's more than a hundred basis points. That's the biggest inversion that we have seen in over 40 years.


Jeremy Schwartz:

That was going to be my next question to you, professor. We've had some people ask, you've talked about that being something we might see more of. [Jim] Bullard talked about that as being a risk for the economy, yet he doesn't seem concerned now. What's your sign? And then people are asking what to do in bond portfolios, Kevin. So maybe after the professor talks, you can say what we think about this in bond land.


Jeremy Siegel:

Yeah, okay. Well, first of all, I did say in the year that we're at to see a flatter term structure and more inversions. However, an inversion of 110 basis points, depending on what's exact security you pick, is a lot. That's more than just a random occurrence. That's a big slowdown in the economy going forward.

So unless the Fed tries to correct that really soon, I don't know if I'd call that recession necessarily, but it is there or close to it. An inversion of 50 or 35 or 25 doesn't concern me as much because I think term structures are going to be a little flatter in the future than they have been in the past under low inflation environments, which it very much looks like we are going to.

And by the way, we should mention no one of course asked about the money supply. The money supply in the year 2022 was the biggest decline in the money supply that the U.S. has experienced since the Great Depression of the 1930s. Now, it wasn't a big decline, but it was the biggest decline since I think 1931 or '30. So that's over 90 years. That's indicative of a big... Now it came after the big explosion in 2020 that we've ever experienced too.

But that's a screeching stop that makes me uncomfortable and has made me uncomfortable the last three to six months because I thought we could have gotten back to that 2% maybe a little bit later, but with very little risk of a recession if Chairman Powell and the Fed moved the money supply rate back down to the 5% level that existed for 34 years prior to the pandemic.

Now, what does that mean for bonds? Let me say that and I'm going to give Kevin a chance to talk. I think bond yields are going lower this year because I think they're going to lower the Fed funds rate at the end of the year. We're going to get back to positive. So I think the bonds will do better. I think stocks will do even better than that.

What are stocks up, 8% so far this year? Wow, in one month? And I said stocks would go up 15% in the year, people thought I was crazy. And then I said it might go up in the first half and people thought I was crazier because whoever thought with the Fed tightening and maybe going too far and blah, blah, blah, blah, blah, how could equities rally? Well, people have to understand how bearish equities were positioned. They're always positioned not for the worst scenario, but a bad scenario. And when there's a hope that it won't be a real bad scenario, you're going to get buying into the equity market. Kevin.


Kevin Flanagan:

Yeah, well, we're in your camp. We're expecting to see the rallying rates as well, especially for duration. But I'll tell you, it certainly came a lot quicker than I would've thought. Right before New Year's Eve, I was looking at a 3.90 10-year treasury and a week or so ago, it dropped intraday to 3.32. So you kind of got the rally a lot sooner than what was anticipated.

But to your point, I do think that for this year, what we're talking about on the investment committee side is what we're going to probably continue to do is to bring duration more in line with the benchmark. So we have been underweight duration in our models. We've lessened that underweight and I could see us continuing to lessen that underweight.

Now, I get asked a question, well, what about going way out on the curve? I think considering the rally we've had right now, you're kind of starting to see a little bit of a law of diminishing returns. But I think getting back to the benchmark, the core of the Agg is about 6.3 years in duration. I think that's the first step of the process rather than trying to hit that home run, especially given the rally we've seen in duration up to this point in time and high yield.

We love to talk about income coming back in the fixed income market, looking at some of the coupons you can clip in the high yield space that even if it is a recession, I think I saw a consensus for second and third quarter GDP on Bloomberg, but it's negative zero point something. It was somewhat softish in nature, not even as much as we saw last year in the first and second quarter.

I think in that environment, investors are being compensated for yield. If you are concerned about potential defaults or whatnot, our WFHY has a very nice quality screen to take in account there. So I think credit also has a role here. A core-plus kind of strategy for fixed income is what we're talking about.


Jeremy Schwartz:

So Brian asked the question, professor, Brian wrote he's enjoying the latest edition of Stocks for the Long Run. There's a few questions. Somebody was asking the sixth edition was the latest available copy. That is the latest, just published last October, November timeframe. So that is the latest.

And Brian's question was, how do you get folks to see your argument for blue chips? Basically talking about value. There's a few other questions on the value to growth rotation. Even today the NASDAQ was up two, the Dow was flat. How much of the value versus growth story was just the rate story? And how do you think about that today?


Jeremy Siegel:

Well, it's a rate and a recession story. Obviously pure rate declines favor the growth because of the duration. The recession, obviously the less chance of a recession, that favors the value. More chance of a recession, that doesn't generally favor the value. So when we saw tremendous... Don't forget, last year rates, they went up on the short end, but on the long end they went up a lot earlier and then they started falling and yet growth stocks continued to crumble because their valuation was just so high that even with the declining rates, people thought they were expensive.

NASDAQ is what, still selling 25 times earnings. It's still high. It's the fallen rates that we predict and I do, and which the long rate does, is that going to be enough? What we see is when there's a big turnaround in the market on value growth, it's usually not a one-year phenomenon. It usually goes over several years. I'm not surprised at the bounce back in January of growth. Look at it, did you see, everyone saw what happened in December.

Some of that was tax loss selling, some institutions didn't want the big losers on their balance sheet when they send out their year-end statements. So there was a lot of selling and there's going to be bouncebacks, especially with the yields having come down, gives you an added bounce back and then some momentum players kind of came in and then even you saw some of the meme stocks even beginning to act. I pushed up against that last week on CNBC.

Nothing's in a straight line ever. A little bit of a people kind of pounced on Tesla and everything else on the short side and it has rallied. But I think the basic trends of growth and value that we saw in 2022 will reassert themselves later in 2023.


Jeremy Schwartz:

Related to that value growth, Alina's asking about views on global, I think some of the international and [Emerging Markets] EM conversation ends up being that same tech versus the S&P [500] excellence, the dollar rolling over a little bit today-


Jeremy Siegel:

Yeah. Now that's also, by the way, very good news, the dollar rolling over. A lot of companies, tech and otherwise really have a big international, almost 40% of the profits of S&P come from abroad. That's going to be a tailwind in 2023, definitely on the market.

As far as international concerned, international is a value play. The tech is U.S. There is some tech outside of US, but it's relatively small. And growth companies are mostly in the US. So to the extent that value is going to do better, international will do better. And there's still much more tip. You've got Europe at 11 to 12 times earnings. Last year, it was 10. Almost always. These are, I think long term. You don't even need capital appreciation when you have a 10 P/E stock, honestly, you don't even need a capital appreciation. But you're going to get it because you're going to get buybacks and dividends, that really yields 10%. Where's the money going to go? So it doesn't need any outright revenue increase and profit increase. It'll get it on earnings per share because of buybacks and it'll have a dividend, and then it'll be inflation protected as all equities are in the long run. And that gives you a yield that can't be touched by fixed.


Jeremy Schwartz:

And there's so many places, by the way, where you're getting 10 P/E's and particularly with Wisdom Tree, you don't even have to go foreign to get 10 P/E's. We have a daily markets dashboard, if you haven't seen it on our markets... There's a webpage called, On The Markets. There's a daily market dashboard. On there, we show all the P/E ratios, U.S. small caps in particular, we have three different ways of getting US small caps. All of them are 10 to 11 P/E's. The foreign internationally, you go to high dividends and you're getting nine P/E's. So you get 11% earnings yields to the professor's point, you don't need growth. Yes, Europe might have slower growth, but you're getting it with the 11% earnings yield. So definitely check out that daily markets dashboard if you haven't seen it.


Jeremy Siegel:

Yeah, I mean think of 11 P/E stock as a TIPS with 11% yield, because, now it doesn't have the stability I know of a TIPS, because it's not guaranteed, but it has a cash flow in real terms. That is very much like an 11% TIPS. And right now, I see the 10-year TIPS is down to 1.15. Wow. That's another reason why you saw a big nice moving NASDAQ. You'll always see that when the yields go down, and they're creeping back a little bit, but still a big decline during the Powell speech. There's a lot of portfolio managers that do growth value and all sorts of macro, and they just look at the yields and will move from one set of ETFs to another, one set of futures to another, to just absolutely take advantage of what's happening with the yield. So you did get that movement into those stocks when the tenure dropped below 3.40, it dropped to 3.38 actually during Powell speech. A little bit over 2.40 right now.


Kevin Flanagan:

So if few gentlemen let the bond guy put an equity hat on for a second, it might be a little askew though, because I've been doing bonds for 30 years. My question would be what I've been reading about, it's not about whether the economy enters a recession, it's if we have an earnings recession. And I was wondering professor, if we could get your thoughts on that.


Jeremy Siegel:

Well, I think this might be a very unusual year, like last year. Last year we added 4.5 million workers to the economy and we had virtually no growth in GDP. I can see us adding almost no workers to the economy and having 3% growth in GDP, because productivity jumps back. Productivity jumping back is great for corporate profits. And even if we lose workers, we might lose a million workers this year, and we might have positive GDP growth. And we might have okay profit growth because basically firms are pairing workers that they hired during the pandemic when they didn't think they could get anyone, and now they find out they don't need it. And they're going to cut costs and keep margins high. So everyone is trying to put everything into the box of a standard recession, or a standard business cycle.

But if you listen to Powell today, he himself said, we have not seen ever this before. And we cannot be sure of the direction of many of the variables. So this idea, we're going to have unemployed workers, they're going to stop the spending, people are talking about a regular recession like the sixties, and the eighties, and nineties. This is very different and it is true that the trigger points for every recession is different. We had the COVID recession, obviously, first time pandemic in a hundred years. We had the financial crisis. We hadn't seen that since the Great Depression. You had to go back to 1990, which was also another, by the way, commercial real estate recession that started that. And then, you had the recession that filed the dotcom bust and 9/11. So there is different triggers, but the COVID one with a big shift in workers, and the willingness to work, and the unprecedented amount of fiscal and monetary stimulus, unheard of, heaped onto the economy, puts it into a class by itself.


Kevin Flanagan:

So do you think there's any chance that professor, based upon what you were saying, that some of the things I've been reading about what we're seeing our layoffs say in the tech sector, is because they over hired post COVID, and that a lot of other industries haven't done that? So, can you connect any dots there? Is it possible we won't see any visible softening in the labor markets?


Jeremy Siegel:

Well first of all, tech and over hired, because their stocks were so high, they had trillions of dollars. What are they going to do with it? Let's got some workers. That was silly. Because it wasn't all bottom line oriented. But there was hiring even outside of tech. As I said, you had over 4 million new workers, if my memory serves me right in 2022, they didn't all go to tech. So they were hiring.

Now it's true that a lot of places needed more, but there was hiring and I think that if demand is curtailed by these high rates and using up a lot of the stimulus, don't forget prices have risen, a lot of that extra savings that was pushed in, is now expended. Firms are beginning you to say, all right, where can I cut? Except for those servers for the restaurants and all the rest, which are still booming. People still want to go out and they want to travel, and those are the only industries.

The job stat, if you looked at it, tech was negative, but almost all of it was in leisure and entertainment, when you took a look at those increase in job openings. So we have a shift, and that that's combined with the shift that a lot of workers decided they don't have to work as hard or they need a higher wage in order to induce them to work. Structural shifts are also going on in the labor market and that's another factor that one has to consider. But bottom line, just like I was surprised that we'd never seen so many new workers and so little GDP in 2022, we might see so little... Making sure I say this right. So many workers and so little GDP last year, we may see so little workers added but much better GDP this year.


Jeremy Schwartz:

There's been a few questions on alternatives, commodities, energy, gold, a bunch of different questions. So gold certainly is reacting to the dollar, lower rates as some of the key inputs. Do you have a view on how energy... Last year energy acted at a very good hedge to both stocks and bonds given some of the key risks of inflation? We've been thinking more about commodities as a useful hedge to stocks and bonds, but any thoughts of from what you see there?


Jeremy Siegel:

Yeah. Well, we favored gold and it did well right at the beginning of the inflation then Bitcoin took over. I think gold is getting back some of its shine, because Bitcoin collapsed last year. Now I know that Bitcoin has bounced back, like Tesla has bounced back, all those others that really got totally oversold tax selling, etc. and so on. But nonetheless, I think that people are going back and hey, that is 5,000 years old, Bitcoin is not 5,000 years old. And so, there's a little bit of buying in that.

Now oil has a positive beta. You could talk about the commodity cycle and all that and it has other factors associated with it, but if there's a recession, there's going to be a drop in the current price of oil. Now you're going to get a term structure there in the futures market, but oil has a positive beta. The other commodities in general have positive betas. Now, what's good about them is inflation, they do have a hedge because it's so easy to see that they are real assets, and not paper assets in inflation.

But very honestly, I'm monitoring money supply. I don't see any re-ignition of money growth, anything that I think is going to cause inflation. I do think there's going to be wage inflation that's going to continue on for quite a few months. That's going to push some up, but it's going to be offset by firms reducing their labor supply and response, and the dis-inflationary forces on commodities in some areas of shipping, cargo rates, et cetera and so on, which have really gone back virtually to those close to the pre pandemic levels. And so, basically commodities, gold, we know that in 220 years, gold's return is between one and a half and one percent above inflation.

Stocks are 6.7. And the 10-year tips is 1.15. So commodities will hedge against certain inflationary forces. The declining dower as real rates go down and federals rates that'll continue to help commodities, but outright commodities, do I like the producers better that are selling for eight, nine times earnings rather than outright commodity, which many of them of course don't have any outright yield, and you're just buying them as a pure play on demand and a pure play on a direct inflation hedge, which I don't think are going to be as popular in 2023 as they were in the last two years.


Kevin Flanagan:

Professor, there was a question about the two-year treasury yield. Got down to 4.08 today, and that they couldn't remember rate hike cycle that could very well continue for another meeting or two, where you have this inversion between where the Fed Funds rate is and the two-year yield. Say, Fed Funds gets to that 4.83 mark you were talking about earlier. Do you think the two-year yield would then be susceptible to the upside in that kind of an environment?


Jeremy Siegel:



Kevin Flanagan:

Or it will continue to hover here and just say, okay, that's fine. You're going to cut rates later this year.


Jeremy Siegel:

Yeah, I think so. Believe it or not, I think that'll happen on a two year. In fact you could argue the higher the Fed goes and that's crazy, the more likelihood of a recession and you want to buy the two year. You can argue that. The higher the Fed goes that they shouldn't go, the more inversion you'll get on the term structure.


Kevin Flanagan:

That's just fascinating when you think about it. I just-


Jeremy Siegel:

Well, don't forget Kevin, 40 years ago, we had it in the 80’s recessions, but you got to go back 40 years.


Kevin Flanagan:

There's a lot of that going back 40 years over the last year or so.


Jeremy Siegel:

Well, the inflation is the highest in 40 years. Yeah. Inflation is the highest. Hike in rates is the highest in 40 years. A lot of things go back to that. But the last inflation we had, and the worst inflation in the US history was the seventies and very early eighties, and it was much worse than what we had now or we had over the past two years. Yes, I know we had record money growth in one year, but we have stomped down on that while before we had nearly 10% money growth for over a decade. So it's a very different situation. Powell mentioned, by the way, in his press conference, the lack of inflationary expectations. He talked about reigniting them. Where are they going to be reignited? From what? People see housing prices going down, they don't see gasoline really moving up and nothing else is really moving up.

Yes, they do see that some of the things on the restaurants are higher and there will be things that'll creep in, to medical bills, et cetera, and so on. Tuition and education was one of the slowest things to move with a dramatic lag. That's why I'm a little disturbed. Powell talks about, I'm waiting to see that the non-rental, non-goods service power, well, some of that is so slow moving that I don't think I'm going to be alive before some of that comes down, going forward. And I don't know why he has to see that going down. First of all, a lot of those rates didn't really go up. When you get administered rates like hospital rates and medical rates, they're so determined by insurance companies and Medicare compensation that are so slow to move. Many companies are going to be putting in requests that they're just going to have to raise those rates and we're going to see them. But that's all because of past inflation. It's not because of forward-looking inflation. And I just hope that Chairman Powell doesn't say, oh my goodness, inflation's not dead because I see it in that. That's like the last thing that's going to finally react to five years of stable inflation.


Kevin Flanagan:

How about China's reopening? Should we be talking about that?


Jeremy Siegel:

I mean, it's offset by the fact that there's going to be a supply of goods. Yes, there'll be some demand for commodities that are more, but I think it's better that we're going to have the supply of goods. Listen, go into Walmart, go into Target, go into Dollar Store. What percentage of the goods that you find come from China? High. I don't know the exact number. I want those goods there, that's going to bring down inflation more than the fact that they may demand this much more oil or this much more commodity. And we're going to see some commodity prices go up as a result. I think it's net good for inflation and net good for the world economy that we see that Chinese production back onto the world market.


Jeremy Schwartz:

There's been a few questions about what allocations do we like for this year and I just want to make a first general statement. Somebody asks about the 60/40 professor. I'll make a few quick comments. We do have a bunch of model portfolios available on our website including Professor Siegel branded model portfolios. And for a number of you on here, I won't talk about each platform, but they're available on many of your firm platforms. So the big Wirehouse is on here. We have Siegel models onto your platform. So you could check out those models in terms of how we're positioned for that. And so professor, but maybe a high level, cause the longevity model is going away from the 60-40 towards the 75-25. We've added some diversifiers in there. But you want to give some comments on how you view that 75-25 versus the 60 -40 today?


Jeremy Siegel:

Right. And by the way, a big new section in the book Stocks for the Long Run, which Jeremy and I have written six edition goes through the history of 60/40 and why we don't think it's appropriate today, and a lot of it has to do with the forward-looking yields on stocks and bonds. The long-term 220 year real return on bonds is 3.5%. That that's almost three times the TIPS level. Now I could argue that the long run real return, forward-looking real return on stocks is not going to be 6.7. Maybe it's five, but it's not down as by as much as what bonds are going to be going forward. I'm not saying bonds might have a good year for one year, but if you're going to be holding on to them to maturity and you're finding out what it's real yield, it's going to be in the 1% range while stocks are going to be in the 5% range.

And that premium is a good deal higher than the long-term historical premium, which means even on retirement portfolio and even with the volatility of the stock market, the probability of running out of money with a 75-25 portfolio is very often lower than that of a 60-40. And in addition, you get a higher legacy amount at the end of the 30 years of in that system. So sort of having your cake and eat it, two, as the expression goes lower probability of running on money and higher money if you do survive to the 30 years at the end.


Jeremy Schwartz:

Professor, I think we'd be remiss without asking, probably like 5, 6, 7 people asked about the debt ceiling. They asked Powell bet the debt ceiling, somebody asked about the comments that Powell made about being a fiscal agent of-


Jeremy Siegel:

He obviously didn't want to get into that question. So let's talk. In my opinion, there will not be a default. Absolutely. There'll be a game of chicken to the end. Maybe they'll kick the can down the road. There's some talk about a six month, nine month delay, see how the Congress works, et cetera. That's a possibility, but they will never default. It'll be a game of chicken. And by the way, if the stock market or the bond market starts falling apart in those few days when they say, oh my god, they're going to default, I'd be a huge buyer.

I'd be a huge buyer because they will not at the end default. And if even if a payment is delayed, you'll get it back with interest very shortly and all those bonds are going to go all the way back up. So I am not one that is at all concerned about the default. I'm probably one of the oldest people here and I've been through this scenario before. I know there's some differences here and probably this game of chicken, the two cars that are going towards each other will get closer than they usually do.


Jeremy Schwartz:

Kevin, anything else you're seeing pop up that you think we should address here?


Kevin Flanagan:

Yeah, I was just looking at that. Just talking about what... So professor mean, you were talking about it earlier and maybe a good way of closing this out as well. You're seeing those probability of recession 65% and we were talking about earnings, economic recession. Do you feel that we will have that "NBER", this was like, I think one of the questions out there, will come out and eventually say A, we did go into a recession last year and B, will we go into another one this year?


Jeremy Siegel:

Well, I don't see how we could go into a recession last year. First of all, it's often considered two consecutive quarters of real GDP decline. We did have a quarter one and quarter two, but with a very strong market and then we popped up positive in third and fourth. It looks positive in the first here. So I don't see a recession. If it's going to come, it would come in the second half of the year. So I don't see, we're not in one now. We're not in one now. It could start in the second quarter if things really start deteriorating. But you're not going to have the NBER call recession with 3.5% All time low employ unemployment rate. You're just not. So we're not in a recession. If the Fed stays stubbornly tough and they don't move, even though there's other signs of deterioration, we could tip into one, yes, that's definitely a possibility, but I don't think we're in one right now.


Kevin Flanagan:

So if we get through the third quarter of this year and we're not in a recession, maybe we're zero point something on real GDP is there the chance the Fed doesn't cut rates this year?


Jeremy Siegel:

Honestly with the productivity bounce back that I think will be here, if we have 0% or let's say 1% GDP growth, and by the way, I think the Fed only predicted 0.5%. We'll have to have a rise in unemployment. We're going to have to have negative payroll numbers. And as soon as you crack that, the unemployment, the last so to speak, bastion of argument the Fed has for continuing to be as tight as it is. That's it. That's it.

So my feeling is that if we're going going to have a half a percent or zero to 1% real GDP growth in 2023, you're going to have negative months of job loss, which I don't think we had a single one last year if I'm correct. And that's going to, it's not impossible even Friday I'm given the standard error. Boy that would open eyes, wouldn't it? Even Powell's eyes. If all of a sudden then we see a loss of 100,000 jobs, not at all impossible. I'm not saying that's what I expect, but just the headlines that first job loss since the covid, all that unemployment jumps, two-tenths or three-tenths, whatever happened, all you need is a headline like that and don't think the Fed is immune from those sort of news headlines, they are not.


Jeremy Schwartz:

Professor, one final question, I will use it as from your book to summarize somebody who's asking about, hey, you believe in stocks for long run, you've talked about bonds versus stocks over the long term that stocks over the long run have had this lower volatility when you go to 20, 30 year periods. Why incorporate bonds generally in this tab portfolio versus the all stock portfolio? Gabriel was typing some questions about the longevity in a 75/25 versus in all equities. Why bonds at all?


Jeremy Siegel:

Why bonds at all? I'll tell you. If you have a real long horizon and you're young or you have enough money that you're going to leave it to your future generations or charity or whatever else. It's a very good question. In fact, the originator of the original 60/40 and I, his name, he wrote an article just escapes me at the moment. Actually, there were some articles that came in that said 100% equity isn't really out of the question at all. And in fact, in some of our models, the probability default of running out of money in a bond stock portfolio keeps on going down as you go towards 100. However, real rates have jumped back. Don't forget real rates at the beginning of this year -1.5%. Now, well, they're 1.14, almost two at one point through a few months ago. That's what actually gave you, if you put in a bond, actually meant that a hundred percent no longer was the lowest probability of default. Still all stocks give you the biggest legacy, the biggest expected final accumulation, but you really did have a trade off.


Jeremy Schwartz:

Well, it's always fun to do these with you, professor Kevin. We're continue to do it. While these are very key market moving events, there will be some replays available if people wanted to catch more of it, you can stay tuned. If you haven't signed up for the weekly emails from the professor, you can follow Kevin on his podcast. Professor Siegel and I have our Behind the Markets podcast. And again, check out the models pages for more information on how to get these ideas all into your portfolios.


Jeremy Schwartz:

Yes, thanks Professor.


Jeremy Siegel:

Have a good day.


Jeremy Schwartz:

Thank you.


Jeremy Siegel:

Good night.



ADP® National Employment Report: measures levels of non-farm private employment. The Report is based on the actual payroll data from about 25 million employees and is produced by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab.

Basis point: 1/100th of 1 percent

Beta: A measure of the volatility of a security or a portfolio in comparison to a benchmark. In general, a beta less than 1 indicates that the investment is less volatile than the benchmark, while a beta more than 1 indicates that the investment is more volatile than the benchmark.

Bitcoin (currency): A digital currency (also called a cryptocurrency) created in 2009, which is operated by a decentralized authority as opposed to a traditional central bank or monetary authority.

Bloomberg Aggregate Bond Index (Agg): a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Curve: Refers to the yield curve. Positioning on the yield curve is important to investors, especially during non-parallel shifts.

Deflation: The opposite of inflation, characterized by falling price levels.

Disinflation: decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time.

Dot plot: a chart based on the economic projections of the Federal Reserve board members that illustrates their views on the appropriate pace of policy firming and provides a target range or target level for the federal funds rate.

Dow Jones Industrial Average: a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

Duration: A measure of a bond’s sensitivity to changes in interest rates. The weighted average accounts for the various durations of the bonds purchased as well as the proportion of the total government bond portfolio that they make up.

Employment Cost Index (ECI): measures changes in the cost of employees to employers over time.

Fed Fund Futures: A financial instrument that let’s market participants determine the future value of the Federal Funds Rate.

Fed Funds Rate: The rate that banks that are members of the Federal Reserve system charge on overnight loans to one another. The Federal Open Market Committee sets this rate. Also referred to as the “policy rate” of the U.S. Federal Reserve.

Federal Open Market Committee (FOMC): The branch of the Federal Reserve Board that determines the direction of monetary policy.

Federal Reserve (Fed): The Federal Reserve System is the central banking system of the United States.

GDP: The sum total of all goods and services produced across an economy.

Growth: Characterized by higher price levels relative to fundamentals, such as dividends or earnings. Price levels are higher because investors are willing to pay more due to their expectations of future improvements in these fundamentals.

Inflation: Characterized by rising price levels.

Inversion (yield curve): An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.

Job Openings and Labor Turnvover Survey (JOLTS): program produces data on job openings, hires, and separations. This data serves as demand-side indicators of labor shortages at the national level. 

M2 Money Supply: Contains all funds deposited in checking accounts as well as funds deposited in savings accounts and certificates of deposit. There are various ways to measure the money supply of an economy. This one is meant to broadly account for the majority of savings and checking accounts held by individuals and businesses across the economic landscape.

Meme stock: refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually heightened due to online and social media platforms.

Monetary policy: Actions of a central bank or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.

Monetary tightening: A course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly or to curb inflation when it is rising too fast.

NASDAQ: A global electronic marketplace for buying and selling securities.

National Bureau of Economic Research (NBER): an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.

P/E ratio: Share price divided by earnings per share. Lower numbers indicate an ability to access greater amounts of earnings per dollar invested.

Producers Price Index (PPI): weighted index of prices measured at the wholesale, or producer level.

Purchasing Manager's Index (PMI): An indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month; below 50 represents a contraction while 50 indicates no change.

Rate Hike: refers to an increase in the policy rate set by a central bank. In the U.S., this generally refers to the Federal Funds Target Rate.

Real Price Index: Indicates the change in real prices compared with the index base time period (e.g. 2000, 1983 or 1970). The real price index is derived by dividing the point figure of the nominal price index with the point figure of the Consumer Price Index of the corresponding time period and base year.

Recession: characterized as two consecutive quarters of negative GDP growth, characterized generally by a slowing economy and higher unemployment.

S&P 500 Index: Market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor’s Index Committee designed to represent the performance of the leading industries in the United States economy.

Treasury Inflation-Protected Securities (TIPS): Bonds issued by the U.S. government. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

Treasury yields: The return on investment, expressed as a percentage, on the debt obligations of the U.S. government.

Treasury: Debt obligation issued by the U.S. government with payments of principal and interest backed by the full faith and credit of the U.S. government.

Value: Characterized by lower price levels relative to fundamentals, such as earnings or dividends. Prices are lower because investors are less certain of the performance of these fundamentals in the future. This term is also related to the Value Factor, which associates these stock characteristics with excess returns vs the market over time.




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For Financial Advisors: WisdomTree Model Portfolio information is designed to be used by financial advisors solely as an educational resource, along with other potential resources advisors may consider, in providing services to their end clients. WisdomTree’s Model Portfolios and related content are for information only and are not intended to provide, and should not be relied on for, tax, legal, accounting, investment or financial planning advice by WisdomTree, nor should any WisdomTree Model Portfolio information be considered or relied upon as investment advice or as a recommendation from WisdomTree, including regarding the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy.

For Retail Investors: WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment advisor may or may not implement WisdomTree’s Model Portfolios in your account. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree, and the information included herein has not been verified by your investment advisor and may differ from information provided by your investment advisor. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange-traded Funds and management fees for our collective investment trusts. This material contains the opinions of the speakers, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise, the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.


WisdomTree Funds are distributed by Foreside Fund Services, LLC in the U.S.

This material contains the opinions of the speakers, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise, the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be consid­ered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpreta­tions or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

Jeremy Schwartz and Kevin Flanagan are registered representatives of Foreside Fund Services, LLC.