Stocks Should Be Favored Over Bonds Amid Rising Geopolitical Risks and Inflation, Says Wharton Professor Jeremy Siegel
Wharton professor Jeremy Siegel has made a case for investors to prioritize stocks over bonds, even in the face of elevated inflation, volatile interest rates, and rising geopolitical risks. In an interview with CNBC, Siegel emphasized that economic growth remains strong, thanks to productivity growth driven by the adoption of artificial intelligence.
Siegel highlighted that America’s GDP growth in 2023 is expected to be double that of 2022, despite job gains being only half of what they were last year. This demonstrates the current environment of productivity growth, which makes companies more efficient. According to Siegel, productivity-driven growth helps lower inflation, benefits earnings, but also leads to higher yields. He believes this scenario favors stocks over bonds, as higher bond yields are driven more by America’s ongoing deficits than by strong economic growth. Siegel’s mantra of “stocks over bonds” is further supported by history, as stocks have historically been effective hedges against inflation in the long-term.
Despite rising geopolitical risks, including conflicts in Israel-Hamas, Russia-Ukraine, and China-Taiwan, Siegel remains confident in stocks. He sees these risks as opportunities to buy stocks rather than reasons to sell them, stating that geopolitical problems have often proven to be buying opportunities throughout history.
Siegel attributes most of the S&P 500’s 8% decline since July to higher interest rates, particularly as the 10-year US Treasury yield approaches the 5% level. However, he believes these higher rates are driven by stronger-than-expected economic growth, which bodes well for corporate earnings in the future. Siegel also reassures that the stock market can handle elevated interest rates, as the current real yields, though higher than in the past decade, are not historically high.
Overall, Siegel’s outlook favors stocks over bonds, given the prevailing economic conditions and the potential for further growth. Investing in stocks is seen as a prudent strategy in the face of geopolitical risks, inflation, and rising interest rates.
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