Only 11 months until happy ending

Fed’s interest rate rises that were expected for this year are postponed. Europe will solve its current crisis just like it managed to deal with the previous ones. The price of oil will be stabilized well above 30 dollars in the next months. European and American corporate profits continue to rise. This is what well-known ‘stock exchange guru’ Jeremy Siegel says. The professor at Wharton School discourages retail investors from going for short-term profits, while he believes that those who patiently wait and withstand the quite significant losses in the first quarter will gain advantages.
According to Siegel, Donald Trump will not win national elections. For Wall Street, the best scenario is when a Democrat sits in the White House again, but the legislation is dominated by Republicans.

Péter Zentai: You belong to those few who are optimistic about this year’s major market developments.  Even in early January, you were confident that by the end of the year, Dow Jones index might reach 20 thousand points. Why are you so optimistic?
Jeremy Siegel:
I never state anything at one hundred percent. Especially something like that because anything can happen.
However, I am quite sure if this year the price of crude oil will stabilize first at 30 dollars, then between 35 and 40, market sentiment will be absolutely positive. In that case, investors will be preoccupied with data indicating the dynamic economic growth of American and European economies. Corporate and microeconomic results will be able to increase their stock exchange indexes by 20-25 percent.

So you do not agree with those who say that the bear market has arrived?
Based on historical experiences, if everyone anticipates a market crash, then the opposite tends to happen.
The professional name of what happened between last December and the middle of this January is correction. In the near future, however, – based on my analysis – there might actually be a chance for a bear market, though if it happens, it is going to be short-lived and not too deep. It will only last for a couple of months. In that case, S&P would fall 20-25 percent, but personally, I do not think such a big exchange rate decrease is realistic. However, if oil prices start to decline again, then this negative scenario will indeed happen ‘spiced with’ significant intermediate falls.

If oil is cheap, petrol is cheap; energy is cheap, which is good for consumers and importers, so it is good for America and Europe!
And in the meantime, European and American energy companies that have a vital role in the economy and in the stock exchange especially, and the thousands of large and small enterprises that directly or indirectly make profit from the energy sector would lose trillions of dollars. Numerous government and corporate investments that were started last year and has grown huge could fail if oil prices stop around 20-30 dollars per barrel.
The majority of investors do not consider the other side of the coin – that in the end, this situation will bring the invigoration of developed economies and the profitability of most stock exchange companies skyrocketing – even though currently panic has spread among most of them.

The possibility of the EU falling apart might explain the panic among European investors… This could also influence American market developments too.
Major American market players are indeed concerned about populists and the advocates of national isolation are gaining ground – not only in Europe but also in the United States.
However, as for America, the victory of Donald Trump as the Republican presidential candidate is impossible.
There has always been a somewhat centralist victory. This is why Hillary Clinton has better chances to win. The best scenario for Wall Street would be if Hillary got into the White House, while the Republican Party had power over legislation – similarly to Bill Clinton’s second term. That period was the golden age of the New York stock exchange.

I think the situation is more dangerous in Europe.
Great Britain – from an American point of view – will remain in the European Union, and we believe that Europe will be able to manage the migrant crisis just like it did the Greek crisis.  Also – to make it clear – national economies tend to become stronger all across Europe. The European economy and financial situation have also been improving for the last two to four years, which cannot be left unnoticed. So this is the actual tendency. In the meantime, Europe’s raw material and energy dependency are decreasing; low oil prices and the weak euro proved to be quite beneficial. Corporate profits are rising and will continue to do so – which will become dominant in the second half of the year.
The economic slowing down of China will only have a peripheral impact on the short and mid-term economic future of Europe and America.

However, Fed’s further interest rate increases might hold back America…
I do not think Fed will continue rising interest rates. To change quantitative easing policy with quantitative restriction requires a more balanced and clear macroeconomic and market situation. There will not be additional three or four restrictive measures this year, even if the majority of investors are counting on it. Although, if interest rates did rise, it would mean a further ten percent drop in the stock exchange.
Most of the major market players – in contrast to the negative expectations of retail and medium investors – see a brighter future. They calculate with a lower interest rate environment by the end of the year.
If Fed does not take measures in March, then it will not introduce restrictions in monetary policy, which will be a defining ‘omen’ for the rest of 2016.
This means that appreciation of the dollar against the euro is coming to its end. No relevant changes are expected in the relation of the two currencies because (1) Fed will not introduce restrictions that could strengthen the dollar, (2) ECB, to a certain level, will keep continuing its quantitative easing policy.

What is the appropriate attitude for retail investors in the current market situation?
In the short term – in the next couple of months – a lot of money can be lost on securities. Serious turbulence should be expected.
I, as an investor, only think in the long term: the second half of the year will likely to compensate for the losses suffered in the first half. I go even further: I believe, those who purchase shares at the current exchange rate will be in a really good position in a couple of years – mostly in Europe, but even in America too.
Referring back to the beginning of our conversation, I hold onto my prognosis: Dow Jones will close the year between 19 and 20 thousand.

Original date of Hungarian publication: January 26, 2016