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Coronavirus spike in the fall won’t derail stock rally

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Coronavirus spike in the fall won't derail stock rally

The rally on Wall Street would not be derailed for long even if there were another spike in coronavirus cases this fall, Wharton School professor Jeremy Siegel told CNBC on Tuesday.

“It’s not going to be a serious correction, not anywhere again down near those March lows. A little pause if we get that wave, but I don’t think it’s going to really stop the longer-term momentum upward,” Siegel said on “Squawk Box.” 

Siegel’s comments come one day after the S&P 500 hit an all-time high and closed above 3,400 for the first time, with the benchmark index now more than 55% above its coronavirus-era lows on March 23.

Stocks are forward-looking assets, with much of their value derived from earnings at least 12 months into the future, Siegel stressed, when explaining why the market may be resilient this fall in the face of a lingering pandemic and related economic challenges.

“That’s why you can have a ‘U’ economy, a ‘W’ economy, and you can still have a ‘V’ stock market,” the longtime market bull said, describing the various scenarios for the shapes the charts could take.

Siegel also remained hopeful that scientists and doctors would be able to develop vaccines and therapeutics that diminish the risks presented by Covid-19 alongside continued support from the Federal Reserve. “Even if it takes another six months more than we hope to get an effective vaccine, when you come back with the liquidity that’s provided by the Fed, that’s a really powerful force.”

Tech companies have been a major driver of the stock rally since March as stay-at-home orders caused widespread adoption of remote work and an acceleration of the online shopping trends that had been in place before the pandemic. 

With the coronavirus demonstrating the importance of technology in the modern world, Siegel said he believes there is room for those stocks to remain strong in 2021. But he said he expects other parts of the market that have lagged in the recovery to outperform next year.

“I don’t think that that means that tech is going to go down,” Siegel said. “The amount of the liquidity that’s been added to this economy is there. It’s not going to be withdrawn by the Fed because unemployment is going to remain high for a long time. … So I think there’s room really for both groups to go up in 2021, even though we finally might get a turn towards value.” 

Additionally, yields on U.S. Treasurys remain very low, as do interest rates on bank accounts, Siegel said. Both of those factors continue to benefit value stocks as investors seek yield, he contended. 

“Dividend-paying stocks are still 2%, 3%, 4% and those are mostly value stocks. To the extent people search those, and the extent that the economy finally reopens with therapeutics and vaccines, that does argue for a rotation,” said Siegel. But, he reiterated, “[It] does not necessarily mean, though, that the tech stocks have to go down.” 

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