Jeremy Siegel says it’s okay to “gamble” on speculative stocks

(Bloomberg) — Shares of meme stocks like Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc. they can still be disappointing, but that doesn’t mean investors should steer clear of them entirely.

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That’s according to Jeremy Siegel, professor emeritus of economics at the University of Pennsylvania’s Wharton School, who says such volatile stocks are gambling more than anything else, though speculative bets can still make up a small part of younger investors’ portfolios.

Siegel, along with Jeremy Schwartz, global chief investment officer at WisdomTree, joined the latest “What Goes Up” podcast to discuss this, as well as the state of the economy, inflation and the markets.

Abridged and slightly edited snapshots of the conversation are presented below. Click here to listen to the full podcast or subscribe to Apple Podcasts or wherever else you listen.

Q: In recent years, we’ve seen the growth of retailers as a major force in the markets, what we call meme stocks. How do you think about this?

Siegel: Let’s take AMC, Bed Bath & Beyond, GameStop. What is their total market value? Half of 1% of stocks or less. And even if you add a few more memes, you’re still getting an infinitesimal portion of the market. Now, it might look like there are a lot of fireworks — there’s a lot of traffic. If you like gambling and enjoy it, go for it. A year ago I said, somewhat conservatively, that I don’t think they will reward long-term investors. They play gaming vehicles more than anything else.

But I always recommend to young people, if you want to play with 10% or 15% of your portfolio in these games, fine. However, put the remaining 85% into some sort of long-term index fund that will make sense to you when you eventually become an adult.

I don’t want to diminish it when I say finally becoming an adult because some of them are adults. And by the way, some people know how to play these markets. I say, when you’re retired like I am. Like I said, it’s fun to play with a portion. I tell my son to play with a portion. But don’t make this a big part of your portfolio, unless you have an incredible amount of money and can afford to lose 80% of it.

Q: What do you expect from the Fed for the rest of this year?

Siegel: What they do and what they should do are not necessarily the same thing. At this particular point, I think what they need to do is on the slightly less aggressive side. Given the data we have so far — again, as the data comes out, things can change — I don’t think it should go above 100 more basis points by the end of the year.

Now, many people are surprised by my recommendation, since I was definitely a super hawk and warned about inflation probably earlier than any other meteorologist or economist. The reason I’m suggesting the bottom line here is because when I look at inflation on the ground — not the official statistics published by the Bureau of Labor Statistics, but actually what’s happening in the active markets, the markets where prices are set daily, the commodity markets, the energy markets, and especially even the housing market — I see prices falling. I don’t really see prices going up.

It doesn’t mean we won’t see rising prices in the consumer price index because the way it’s built is way behind what’s really going on out there. However, I think the growth that has taken place so far and what the market is expecting and has built in has slowed the money supply dramatically. In fact, the money supply has contracted since March, which is almost unprecedented. And as a result, even though there is inflation in the pipeline, my sense is that we should not get too aggressive at this point. I see inflation peaking in the real world, although we will remain high in the statistics.

Q: You said recently that we’re already in a mild recession — can you talk more about that?

Siegel: A kind of rule of thumb, a recession is two quarters of real GDP falling. According to the official statistics, we had them in the first and second quarters. And that’s what I meant. Now, I don’t think it will be called a recession. The National Bureau of Economic Research, which is a private research organization, not the government, makes the official determination months later. And they look at much more than GDP.

But I was saying that it looked like we were in a real, if not outright recession, a growth recession, which by the way, looks like it’s going to continue this quarter. My estimates are between zero and one. Now, we only have real data for July. Yet we’ve had an unprecedented drop in GDP while at the same time we’ve had strong labor market growth, which is absolutely unheard of in history.

If we have added 3.2 million jobs to the payroll and GDP is down, how is that possible? What are these people doing? Are they twiddling their thumbs or claiming to work at home for eight hours when they work at home for four hours? I do not know. But we have something we never had before. And I mean 75 years of statistics, we’ve never had an increase in the labor force and a decrease in GDP, and the numbers are absolutely amazing. And I think the Fed and the Biden administration should be working on this problem of how we have all these people, new hires, but also falling GDP. It’s an unprecedented data productivity collapse. And I mean, almost by orders of magnitude, we haven’t seen anything like it.

Q: Where do you think is the best place to invest right now?

Schwartz: One of the things we’re seeing a lot of interest in is floating rate bonds. I would still be careful with the duration. We might think interest rates don’t have much to go, but with the inverted curve, you could get very good short-term rates and not take on any of that duration risk. So our USFR Floating Rate Fund is now our largest ETF at over $7 billion. And that, I would argue, is the best play for the Fed and the bond market.

Within equities, there’s certainly been a huge shift in factors from expensive growth stocks to value, and no better than one of the original ETFs that WisdomTree launched 16 years ago — DHS, High Dividend — has been significantly positive on the year. And that compares to even value stocks. Value has outstripped growth. Development is delayed. More expensive development has been delayed longer. But high dividends are positive — obviously energy is part of that, but it’s not just energy, it’s less than 20% energy — and so high-dividend stocks in every sector outperform lower-dividend stocks in every sector.

Commodities and the dollar I think are very interesting. Because there was often a negative correlation and you thought you needed a low dollar for commodities to do well. You could say that maybe one of the things that is suppressing gold is the very strong dollar and the higher interest rates that you got this year. But the dollar continues to move with momentum. It was partly an interest rate trade.

When you look at, say, the pound and the euro, it actually trades more with the energy crisis. If you look at the pound specifically, their rates were going up and the pound was going down. And so there are many interesting things in the dollar. We were one of the first people to do currency-hedged ETFs. You still haven’t seen any meaningful streams on them. You have seen flows to the dollar. Even just this week, we’ve seen flows coming into the dollar, returning to highs. People who hedge currencies are still betting on the euro, yen and all their traditional international funds, which amazes me. But the dollar has been very, very strong with higher Fed rates.

(Heading updates, second paragraph)

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