5 Reasons Stocks Have Bottomed Out with a Rise Ahead

  • It’s too easy to make a bearish case for stocks in the face of inflation and a hawkish Fed, and that’s bullish, according to Fundstrat.
  • The research firm predicts volatility ahead for the market, but expects more upside by the end of the year.
  • These are the 5 reasons why Fundstrat thinks the market already bottomed on February 24th.

Faced with rising inflation, a warmonger

Federal Reserve

and the likelihood of further interest rate increases, everyone is bearish on equities, and it’s bullish, according to Fundstrat’s Tom Lee.

“Nobody [is] bullish + ‘bad news’ only way to avoid [a] ‘hard landing’ again from Fed, stocks [are] behaving as if February was [the] down,” Lee said in a Monday note.

The strategist pointed out that a falling stock market, a less bullish consumer and economic shocks outside the United States are doing a lot of work for the Fed in helping to tighten financial conditions.

These are the 5 reasons stocks are unlikely to fall below their Feb. 24 low of around 4,115 on the S&P 500, and why they likely have more upside potential by the end of the month. year, according to Fundstrat.

1. “4 of the 4 quantitative signals seen at the bottom were generated in March 2022.”

Lee highlighted four quantitative stock market low signals that flashed in late February and early March. Individually, these signals are usually seen around major market lows.

“Since 1945, a group of 2+ of these signals [has been] viewed 9 times… 8 out [these] 9 times [were] buyable lows,” Lee said. The four S&P 500 indicators include four straight days up 1%, nine straight days of 1% ups, a long streak of the VIX above the 30 level, and the S&P 500 regaining its 200-day movement average after being 6% below.

The last time these four signals flashed around the same time was in April 2020, shortly after the stock market bottomed out amid COVID-19.

bear market


2. “Financial conditions have tightened sharply, including higher borrowing costs.”

The recent stock market decline has already destroyed up to $15 trillion in household net worth and helped bring financial conditions under control, essentially doing a lot of work for the Fed. “Sentiment has turned massively negative, [and] bond markets have done a lot of the work for the Fed pushing rates higher,” Lee explained.

This should temper consumers as the “wealth effect” comes into play, i.e. the idea that a perceived change in a consumer’s net worth will lead to a change in spending.

3. “US consumers are already slowing down on non-gas spending.”

“Rising gasoline prices are having a direct impact on consumers’ wallets. Given that this is partly fueled by the US policy response to the Russian-Ukrainian war, this is arguably a ‘tightening’ of tax policy “- the hit to consumers is in real time as consumers pay for gasoline,” Lee said.

According to data from JPMorgan, US consumer spending is starting to recover and gasoline prices could continue to weigh on consumers’ wallets. “By slowing spending, it’s already a sign that rising gasoline is slowing the economy, which the Fed is trying to achieve through its policy actions,” Lee said.

4. “Europe facing GDP shock from energy/commodity boom.”

Europe is on the verge of an economic slowdown due to Russia’s continued attack on Ukraine and soaring commodity prices. “Once again, the EU’s hit to its GDP growth is partly due to the work of the Fed,” Lee said.

5. “China zero COVID-19 [policy] resulting in a massive contraction.”

As China imposes economic shutdowns in major cities in an attempt to contain the spread of COVID-19, a sharp decline in economic activity will be realized. This is a big problem given that China is the second largest economy in the world.

“It’s slowing global growth again and doing the Fed’s job,” Lee said.

Tighter financial conditions should help reduce demand and, in fact, help slow the rise in inflation. That would give the Fed more flexibility in its plans to shrink the balance sheet and raise interest rates, which in turn could help risky assets.

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