The Current Narrative Is Dominated by Bonds

Jeremy Siegel

October 24, 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.

The current market narrative is dominated by the action in the bond market, with the 10-year yield briefly touching 5% last week. Concerns about rates staying higher for much longer are keeping long yields ticking higher. I do think the recent high inflation that we’ve experienced is raising the premiums and compensation demanded to own bonds. This is not just a short-term phenomenon, but something that can last for a number of years.

Fed Chairman Powell spoke last week and confirmed what we’ve been saying for weeks—that the Fed is not going to move rates on November 1. The principal reason is what I just mentioned—the higher long-end rates are tightening conditions without the Fed raising short-term rates. It seems Powell has been very successful at getting unanimity and no dissent and the chorus from recent Fed officials hinted for another pause. It could also very well be that the last rate hike already occurred, and the Fed is now in permanent pause mode. The data over the coming months will dictate the rates, of course.

The 30-year mortgage commitments breached 8% last week—this is certainly news that is impacting the new home buyer. But there remains no weakness in real economic data. Jobless claims fell and were below 200,000 last week. Consumer spending is still relatively strong.

This week we’ll get the GDP for the third quarter and economists estimate 4.4% but some forecasts have it surpassing 5%. We’ll also get the PCE deflator, which is of interest to the Fed, but we already heard from Powell that the Fed is not moving rates at the November 1 meeting.

We’ve had about 20% of S&P 500 companies report earnings and estimates are showing over a three-fourths beat rate, which is fairly good. There is some caution on the fourth quarter and the impact of higher rates, but nothing too serious yet.

Last week the highlights were Netflix and Tesla, which moved in opposite directions with different reads on the pulse of consumer spending. Tesla is more sensitive to interest rates and borrowing costs and had to mark down prices to incentivize buyers. This is one sector starting to feel the brunt of higher borrowing costs.

But in general, the stronger economy is supporting earnings growth in the fourth quarter and in 2024, which makes me bullish for 2024.

How high will long-end rates go? Technicians have called for 5.1% to 5.2%. I would be very surprised if the 10-year goes above 5.25% because I don’t see inflation moving up. The Middle East is a problem, and oil is a wild card, but other commodities are certainly being pressured by higher real rates and a stronger dollar. There have been momentum traders jumping on the “short bonds” bandwagon. If we get any weak economic data reports at all, I expect the Fed to cut rates.

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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