The stock market is in the ‘eye of the storm’ of uncertainty but it already hit bottom and is poised to turn higher, Fundstrat says
The stock market is in the “eye of the storm” of uncertainty as Russia invades Ukraine, according to Fundstrat’s Tom Lee.
But the stock market likely already found its bottom when the S&P 500 hit 4114 on February 24.
A rebound in the economy, a less hawkish Federal Reserve, and a steepening yield curve suggest more upside ahead for stocks, Lee said.
US stocks have entered the “eye of the storm” of uncertainty as Russia invades Ukraine and inflation remains elevated, but the bottom in the stock market was likely already reached on February 24, according to Fundstrat’s Tom Lee.
That’s because stock market indicators like the volatility index have failed to make new highs even in the face of worsening news from Ukraine, he said in a Wednesday note.
“Despite continuing fallout from [the] Russia-Ukraine war, markets are still holding above the February 24 lows,” Lee observed.
A flurry of economic sanctions from Western countries against Russia, including those hitting its banking system, will lead to an economic and liquidity hit while building up selling pressure in equities.
But that doesn’t mean the S&P 500 needs to enter a bear market like many expect, Lee said, pointing to depressed investor sentiment from investors.
“The consensus is pretty concerned. And anyone listening to business news, Twitter, or anything will find a steady drumbeat of pundits saying we are already in a bear market,” Lee said.
Bearish investors often point to the fact that a persistent rise in inflation, combined with a decline in corporate earnings guidance, should lead to a stock market that gets crushed.
“But the yield curve did not get this memo. The long-term yield curve is pushing higher, quietly,” Lee said. A steepening yield curve, or the difference between short-term and long-term interest rates, is often a sign of a strengthening economic outlook.
And a strengthening economic outlook remains a real possibility, according to Lee, who noted that there is still room for a demand recovery from the COVID-19 pandemic. Daily TSA passenger figures are still below their pre-pandemic highs, and COVID-19 mandates are beginning to expire across the country as daily cases plummet.
“Thus, we see upside to economic growth as COVID-19 restrictive mandates ease,” he said. That economic boost could be compounded by the pandemic becoming less fearful, capacity restrictions in buildings being removed, and a resurgence in face-to-face meetings.
Finally, the Federal Reserve is likely to be less hawkish than most investors expect, according to Lee. The chance of a 50-basis-point rate hike later this month plunged after Russia invaded Ukraine. That represents a bullish tailwind for the stock market.
Ultimately, investors shouldn’t expect a flow of good news to mark the bottom in stocks. “Markets don’t bottom on ‘good news’ coming. They bottom on bad news. The bottom [in stocks] is when stocks favorably respond to negative events,” Lee said. And let’s face it, there’s a lot of bad news out there.
Read the original article on Business Insider