Can the market cope with inflation: time to sound the alarm?

Wharton Business School finance expert Jeremy Siegel, known for his positive outlook on the future of the stock market, now seems to be sounding the alarm about the market's ability to handle inflation, writes CNBC.

Last Friday, in an interview on CNBC's "Trading Nation," he quipped, "We've got a tough time ahead of us. Inflation as a whole is going to be a much bigger problem than the Fed thinks. Siegel also warned that rising prices are a serious risk.

Suffice to recall that in his preview of January 4, Siegel was clearly bullish about a market rally, when he was in the top 10, predicting that the Dow Jones Industrial Average would soar to 35,000 points this year. On August 16, the index was at an all-time high of 35,631.19 points, and it closed last Friday at 34,326.46 points.

Now we can clearly see a cautious shift in its outlook. The biggest threat that Wall Street will face, in his opinion, is that under the pressure the Fed will begin to accelerate its bond-buying cuts before the market is ready for them. It is in Powell's abandonment of the easy money policy earlier than expected that lies the risk.

Siegel believes that easy money in the stock market has a lot to do with the influx of liquidity provided by the Fed. If the cancellation of these policies happens sooner than the market had hoped, it also means an earlier interest rate hike. Neither would be good for the stock market.

Siegel is especially worried about the impact of such events on stock growth, especially in technology. He suggests that the high-tech Nasdaq, which is now just 5% below its all-time high, should be prepared for a sharp loss: "This will cause problems for the 'long-playing' stocks. It's going to be in the direction of value stocks."

The lucky ones, he said, will be stocks of those companies that benefit from rising rates, have price power and pay dividends.

"Yields are very scarce, no one will want to mess with long-term government bonds, which I think will suffer a lot over the next six months," Siegel said.

Against a backdrop of rising inflation, favorable conditions await companies operating in sectors such as electric power and consumer goods, known for their high dividends.

The specialist gave a positive outlook for dividend growth for such firms, which can raise their prices because dividends are historically protected against inflation.

He is also optimistic about gold, which has become a relatively cheap inflation-protection vehicle that investors ignore amid the popularity of digital assets like bitcoin.

He's also not embarrassed by the jump in real estate prices: "I don't think it's a bubble...investors were kind of anticipating this inflation. Mortgage rates are going to go up a lot, so real estate is still a good asset."


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