A lot of Buzz about Quantitative Tightening

Jeremy Siegel

January 29, 2024

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.

I have been describing the economic data as a Goldilocks scenario—and recent data continues to confirm this view of the economy being strong without being so strong that it motivates further tightening from the Federal Reserve (Fed). I was actually a little relieved jobless claims jumped a touch this week off of the near 60-year lows from the prior week. We don’t want a big jump in unemployment, but we also don’t want so much tightness in the labor market to concern the Fed to stay too high for too long. Jobless claims in the range of 200-240k each week is what we’ll be watching for the Goldilocks scenario to continue.

All other real economic indicators are coming in strong. Real gross domestic product (GDP) for the fourth quarter came in at 3.3%, well ahead of consensus expectations of 2.0%. Of course, these are past data points and some of the strength can be attributed to inventory build-up that can weigh on the current first quarter GDP. Early estimates for the first quarter GDP are at 1.5 – 2% although the Federal Reserve Bank of Atlanta’s GDPNow model shows growth closer to 3%. A few other real economic indicators also came in strong last week—notably the S&P Global Purchasing Managers’ Index (PMI) indicators were ahead of expectations.

These data points will make the Fed decision this week easy. There will be no change in rates, and Powell will not indicate any rush to lower rates with the economy humming. The Fed must be looking at the inflation data as very positive. The core Personal Consumption Expenditures (PCE) Price Index, one of the Fed’s preferred measures of inflation, has been annualizing below 2% for the last six months. But the inflation data has not come in so low that the Fed will be rushing to lower rates. But I will say, if the Fed were to use some measures of real time rents—from either the Apartment List Rent Estimates data series or even the Federal Reserve Bank of Cleveland’s measure of real time rents—the Fed would see the Consumer Price Index (CPI), both core and headline, well below its 2% targets.

After bad policy for two years following the COVID pandemic, the Fed finally has monetary conditions tight enough to bring the economy back to a more normal state without causing inflation. The tone we’ll hear from Powell is he is quite pleased with the trajectory of the economy and inflation.

There is a lot of buzz about whether quantitative tightening (QT), the reduction of the Fed’s balance sheet, will be tapered or allowed to continue at its current pace. The Fed added $4 trillion of reserves to the system during the pandemic stimulus and it has only reduced this by $1 trillion thus far. My feeling is the Fed does not need to taper QT. I don’t see any tightness in reserves, but I’m sure there be questions about QT following his speech.

Earnings are coming in ok so far, with an aggregate beat rate around 70%. There’s some notable beats and misses. The most notable miss was from Tesla. In a year of political consequences, Elon Musk highlighted the strength of China electric vehicle (EV) companies like BYD Company, and he commented that without tariffs he is not sure EV companies around the world will be able to compete with China. As you may recall, Tesla is part of the Magnificent Seven. Can these stocks keep up their momentum? Tesla’s performance last week shows what happens when you have a high multiple but then questions emanate about the robustness of earnings growth.

We are getting further into election season, and it looks very much like Trump versus Biden rematch. I don’t see one candidate being better or worse for the stock market. There are pluses and minuses for each. On the positive side, while many want alternative candidates, I point out it could be much worse. We do not have a socialist candidate that could really mess up the capital markets. I think it’s more important to know whether the House of Representatives will stay Republican. They hold a very narrow margin and I think that the House might turn Democratic while the Senate will flip Republican. Tax laws will be reshaped after the presidential race, but the big picture is that neither candidate is dramatically different for our equity market prospects.


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. Core CPI excludes food and energy costs.

Earnings growth: The annual compound annual growth rate of earnings from investments.

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.

Multiple: A multiple measures some aspect of a company’s financial well-being, determined by dividing one metric by another metric.

Personal Consumption Expenditure (PCE) Price Index: A measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The core PCE Price Index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

S&P Global Purchasing Managers’ Index (PMI): A monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is considered to be a key indicator of the state of the U.S. economy.

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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