A Fully Justified Rally in the Markets

Jeremy Siegel

December 18, 2023

Jeremy J. Siegel, WisdomTree’s Senior Investment Strategy Advisor, is the Russell E. Palmer Professor Emeritus of Finance at The Wharton School of the University of Pennsylvania. Professor Siegel has written and lectured extensively about the economy and financial markets and is a regular contributor to the financial news media. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by BusinessWeek magazine. His book, Stocks for the Long Run, was named by The Washington Post as one of the 10 best investment books of all time. His latest book, The Future for Investors, is a bestseller.

Christmas came early for the stock market! Even I was surprised how flexible Fed Chair Jerome Powell was during his press conference. I have been lecturing that the primary risk for equities going into 2024 was a too-stubborn Fed stuck on a false narrative of the 1970’s era inflation risks. 

I thought Powell would remain hawkish for yet another meeting, but not only did the Fed put more rate cuts into their Dot Plot, Powell actually communicated the Fed was starting to talk about rate cuts. This is a far different tone than Powell denying cuts as a consideration just a few short weeks back. This good news, combined with a very cool PPI report on Wednesday, led to an explosion in the markets—a rally I see as fully justified.  

Small caps rallied the most and that too I see as justified and may continue. Many of the WisdomTree small cap dividend or earnings focused strategies sport P/E ratios around 11 to 12 times their earnings, while the S&P 500 is 20x earnings. These small cap discounts are pricing in a recession and the Fed’s more adaptable approach to policy unquestionably lowers the chance of a recession. 

I was putting the odds of avoiding a recession next year at slightly better than 50/50, but post FOMC meeting the odds of skirting a recession had to improve to at least 2/3. While the significant fall in rates one could argue impacts higher duration growth stocks, the earnings impact from lower recession risk dominated the market trading. 

A few weeks ago, economic data had been coming in quite weak, but we had some positive news last week.  I was impressed by jobless claims falling and retail sales came out above expectations although there was a downward revision on the previous month.  Momentum is actually slightly stronger than expected. Manufacturing is still on the weak side; we saw Friday some pretty low PMI reports, but nothing that’s “falling off the cliff.” To be sure, there will be a slowdown from the blistering GDP rate of over 5% in Q3 and consensus shows between 1.5-2% for Q4. 

I expect the rally in equity markets to continue. The Dow already hit all-time highs. I expect the S&P 500 to follow and probably the NASDAQ.  But we should see continued rotation to mid and small cap value stocks.  There is also relief for the banks if rates are coming down faster. This is good for real estate. This is good for the struggling office sector as banks rollover loans. 

The move in bonds has been extreme over the last 6 weeks and caused many to scramble for longer duration. I do not see more upside for bonds unless there is a recession. Clearly real softness in the economy could lead to 3% for the 10-year bond rate or lower. But I do not see us getting back to 1% rates of the early ‘20s. The inflation risk for longer term bonds and rising correlation between stocks and bonds leaves investors demanding more compensation for their fixed income holdings. My sense is the 10-year bond fluctuates between 3.5-4% with a future Fed funds rate eventually settling to 3%. For now, you can still earn well over 5% in short duration notes and that might provide a better hedge of key risks (a stubborn Fed) than the long duration bond which factored in cuts. 


Bond yield: Refers to the interest received from a bond and is usually expressed annually as a percentage based on its current market value. 

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. 

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. 

Gross Domestic Product (GDP): The sum total of all goods and services produced across an economy.  

Hawkish: Description used when worries about inflation are the primary concerns in setting monetary policy decisions. 

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

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

Purchasing Managers’ 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. 

Past performance is not indicative of future results. You cannot invest in an index.

Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, 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.

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