With a year-end S&P 500 target of 1775, JPMorgan’s Tom Lee is the most bullish equity strategist on Wall Street.
In a note to clients earlier this week when the government shutdown began, Lee argued that the worst of the sell-off in the stock market related to the shutdown was likely behind us, writing, “thus, we would remain steady buyers of equities.”
Chatter among market participants is now turning to a more serious issue: disagreement in Congress over raising the debt ceiling which, if not resolved in a timely manner, could cause a default on U.S. government debt.
In a note today, Lee says the market is better off this time around than in August 2011 — the last time Congress had to authorise an increase of the nation’s statutory debt limit.
“In contrast to 2011, economic circumstances are notably better. In 2011, confidence in global growth was tenuous at best — U.S. housing and autos had yet to turn positive, the euro area was still gripped in an economic crisis and Japan remained mired in malaise,” writes Lee. “Thus, the debt ceiling and resulting fiscal cliff raised multiple concerns about tipping the global economy back into recession. In contrast, many economists in 2013 argue that global growth is being held back by US fiscal uncertainty.”
However, the one thing that could derail Lee’s positive view is a debt ceiling accident.
“We believe the risk of a U.S. debt default is not high enough at the moment to justify selling — but to be clear, a debt default would have serious negative consequences to our positive thesis on equities were it to occur,” says Lee. “As we noted earlier in the week, equity markets have shown decent performance once a shutdown begins. The greater risk, obviously, is of a potential debt default. As we noted above, this does not yet appear to be a material concern of the debt markets (as evidenced by CDS spreads) and we believe both political parties have enormous interest in avoiding this outcome as well.”
Ultimately, Lee thinks the effect the shutdown is having on Federal Reserve monetary policy is supportive of the market.
“Fed now likely on hold longer, which provides a decent insurance policy for markets,” writes Lee. “Finally, the government shutdown will make getting a clean read on the economic data more difficult for several months. Thus, market expectations for Fed tightening are now pushing out, which is lowering interest rates and is short-term helpful for equities.”