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Wharton professor Jeremy Siegel warns the recession threat is growing – and stocks could struggle in the days ahead

jeremy siegelJeremy Siegel.

Steve Marcus/Reuters

  • Jeremy Siegel sees a rising risk of recession and a downbeat outlook for stocks.
  • The retired Wharton finance professor expects the Fed to cut interest rates later this year.
  • The US central bank may be underestimating the fallout from the banking fiasco, Siegel says.

Don’t be surprised if the US economy tanks, stocks tumble, and the Federal Reserve slashes interest rates later this year, Jeremy Siegel says.

“The risk of recession has increased clearly,” the retired Wharton finance professor warned in his weekly commentary for WisdomTree, published on Monday.

Siegel pointed to the Fed’s “rather disturbing” projection last week that the US economy will grow only 0.4% this year. Most economists are expecting annualized growth of 2% to 3% this quarter. Given that fact, the central bank’s estimate implies the economy will shrink on average over the next three quarters, Siegel said.

“These Fed forecasts are therefore predicting a recession,” the veteran economist noted. He added that US central bankers seem to be predicting net job losses for the next nine months, and a rise in unemployment to 4.6% next year.

Siegel also flagged a “very weak” report from the US Census Bureau on Friday. It showed a 1% drop in new orders for manufactured durable goods in February, which the professor cited as evidence of a looming downturn.

The market guru said he was “further disturbed” that Fed Chair Jerome Powell, in his news briefing last Wednesday, refused to discuss whether interest rates could fall by the end of the year. Siegel emphasized that bond markets and Fed funds futures are pricing in two to three cuts by the end of December.

Moreover, Siegel warned the Fed may be overlooking the potential fallout from the current pressure on banks, fueled by a trio of lenders folding up  in recent weeks. He noted the impact could be equivalent to a large interest-rate hike, in terms of its tightening effect on financial conditions.

“The Fed is being too sanguine about the current lending contraction and needs to be more forward looking and cautious here,” he said.

In response to inflation hitting a 40-year high last year, the Fed has hiked interest rates from nearly zero to upward of 4.75% in a bid to cool demand and curb the pace of price increases. The central bank might realize it has clamped down too hard and reverse course if asset prices tumble, Siegel said.

“Maybe the markets will knock sense into the Fed,” he said. “I do think the Fed will be lowering rates by the end of the year and perhaps easing very rapidly.”

Siegel, the author of “Stocks for the Long Run,” warned the stock market’s outlook has darkened as multiple headwinds buffet companies.

“I am more cautious about equities,” he said. “Equities will likely struggle with recession risk rising and an overly tight Federal Reserve.”

Siegel added that cyclical and value stocks might be hit hardest by an economic downturn and higher borrowing costs. But he noted the damage could be limited if the Fed cuts rates sooner rather than later.

“If the Fed gets it, we can avoid the worst-case scenarios,” he said. “But conservative positioning makes sense at the moment.”

Read the original article on Business Insider
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