Jeremy Siegel: Stocks Beating Bonds as Inflation Hedge

Stocks, outpacing bonds this year, can still perform well, Wharton School economist Jeremy Siegel suggested this week.

“If you are worried about the inflationary impacts, stocks are far better hedges than bonds — as companies can pass along their own input cost spikes to consumers,” he wrote in his weekly commentary published Monday for WisdomTree, where he is senior economist.

“If you bought the inflation-hedged bonds at 2% yields, it would take 36 years to double your purchasing power,” wrote Siegel, an emeritus professor at The Wharton School. “The S&P 500, however, is priced around 18 times next year’s earnings, giving a 5.5% earnings yield. This takes just 13 years to double purchasing power.”

As the end of the year approaches, there will be a renewed focus on clients keeping money in checking accounts at banks, where cash earns almost nothing, when Treasurys “offer over 5.5% and the Fed says it is committed to keeping rates elevated next year,” Siegel said.

“This could create another shift of money away from the banks,” which would pressure small-cap stocks, because there are more banks in the small-cap indexes and also because small companies face higher bank borrowing costs that restrict lending, he said.

“I like the valuations on small caps but see the challenges in funding markets until rates head back down,” Siegel wrote.

 Photo: Bloomberg