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Stocks will rally in 2022 even as US interest rates hit 2%, Wharton professor Jeremy Siegel says

Jeremy Siegel is a long-time market commentator.

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  • US stocks will rally in 2022 even as the Federal Reserve hikes rates, Jeremy Siegel said.
  • The Wharton professor told Bloomberg that there is no alternative to stocks if investors want to beat inflation.
  • The S&P 500 rose more than 25% in 2021, and analysts are divided about the 2022 outlook.

US stocks will rise in 2022 even as the Federal Reserve hikes interest rates to around 2% to stamp down on inflation, according to Wharton finance professor Jeremy Siegel.

Sky-high inflation has spurred the central back to action, and it has signaled that it’s likely to raise rates three times this coming year. Markets expect the Fed to start hiking in either March or May.

Siegel told Bloomberg TV he thinks the Fed is behind the curve on inflation, and so will have to increase interest rates more than expected.

“I would not be surprised to see the short-term interest rate go to 2% by year-end,” he said Monday.

Yet even a sharp rise in borrowing costs will not stop US stocks from marching higher this year, Siegel said. He predicted that equities will still have an “up year, but not as much as 2021.”

The S&P 500 index rallied more than 25% in 2021, as the Fed’s ultra-low interest rates and huge bond purchases juiced the markets. The arrival of coronavirus vaccines added to the optimism.

But analysts are divided on the outlook for equities in 2022, citing factors such as coronavirus variants and US midterm elections as a source of uncertainty.

Siegel told Bloomberg TV that inflation and the Fed’s plans to hike interest rates will cause some volatility in stocks, with “bumps coming toward the middle.”

Even so, equities remain the only option for investors who want to try to beat inflation, he said, given that bond yields remain historically low and the real value of cash is being eroded.

Read more: Wall Street’s biggest banks share why they’re most bullish on stocks in these 6 sectors in 2022

Stocks will rise because of “that old saying that we all know: TINA, there is no alternative, in an inflationary environment,” Siegel said.

At the same time, investors will have to be more selective than before about which stocks to buy, he noted.

Stocks with good dividends are likely to fare well because they offer investors stronger returns and the chance to beat inflation, according to the Wharton professor.

In contrast, “high-flying tech stocks” that are yet to yield much in the way of profit will likely suffer, he said, as higher bond yields and inflation make them look less attractive.

Siegel added that he doesn’t think the US stock market looks overvalued, especially when the dominant tech names such as Apple are removed.

He said earnings ratios are above the historical average “but still not that expensive, certainly with interest rate levels as they are … I still think it’s a reasonable stock market.”

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