Stocks are expected to experience a year-end rally, following the historical trend of November being a strong month for the market. Renowned Wharton professor Jeremy Siegel believes that bond yields are nearing their peak and that the end of a historic sell-off is within sight.
After months of stock sell-offs, investors have been worried about their 2023 gains. However, historical data suggests that investors are about to enter a traditionally robust month, which could help drive equities towards a year-end rally. According to Jeremy Siegel, strong seasonality and a few key developments will contribute to the market’s gains as 2023 comes to a close.
Siegel stated in a CNBC interview, “In the last 25 years, November is the second-best month of the year, just slightly behind April. So I do think we’re going to have a year-end rally coming up.” He also emphasized the persuasive valuation and expressed optimism about better growth in the coming year. Siegel believes that the higher real interest rates reflect optimism about growth in 2024. While this may put pressure on the stock market to discount higher earnings, he is confident that those higher earnings will materialize.
As the central bank convenes this week to make its next decision on interest rates, Siegel believes the meeting is unlikely to provide new information to investors. The Federal Reserve has already raised interest rates 11 times since March 2022, with two pauses, including the last meeting in September. Siegel stated, “The Fed is certainly not going to do anything on Wednesday, and they’re going to leave the door open.”
The recent downward movement in stocks was largely driven by Federal Reserve Chair Jerome Powell’s remarks that rates would remain elevated for a longer duration than the market had anticipated. In response, Treasury yields surged, causing investors to sell off bonds and resulting in a historic crash comparable to some of the biggest in history. However, Siegel believes that yields are approaching their peak. He mentioned, “I think we’re pretty near the top of the 10-year, maybe five and a quarter,” referring to a potential ceiling on the 10-year Treasury yield of 5.25%. He also noted that this level is far from the yields witnessed in the 1980s, when single-digit price-to-earnings ratios were prevalent.
The S&P 500 has witnessed a 7.7% year-to-date increase and is up approximately 16% since its low in October 2022. Although valuations of the so-called “Magnificent Seven” tech stocks appear high, Siegel pointed out that valuations are historically low in the rest of the market.
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