TOM LEE: Stock market sentiment right now can be summed up in two words

There are two words that capture the way investors feel about the market right now: Indecision and uncertainty.

Even the most bullish strategists on Wall Street have become nervous about the stock market in the past few weeks.

The S&P 500 is down 5% year-to-date, and 6% since its most recent peak in mid-August just before its biggest tumble in four years.

In a note to clients Friday, Fundstrat’s Tom Lee wrote that this sell-off hurt investor confidence more than the declines during 2011, 2012, and 2014:

“Investors are positioned for continued bad news… Investors are questioning core assumptions, particularly regarding Emerging Markets, but also the durability of the U.S. expansion. Concerns range from profit margins peaking, labour pressures, to equity market structure. And because of heightened volatility, risk books have shrunk dramatically. Indecision and uncertainty probably better describe sentiment, but it is a dramatic deterioration of confidence.”

Another huge source of uncertainty is the Federal Reserve’s interest rate decision next week.

Fed fund futures are pricing a meager 28% chance that rates will rise for the first time in nine years.

Also, we’ve recently heard from FOMC members who are strongly for or against an imminent hike, and it seems markets aren’t sure which opinions the committee would place more weight on.

This uncertainty has also played out in the way stocks have recently traded. As Bespoke analysts noted earlier this week, the stock market has become “all or nothing“. More frequently, over 400 (or 80%) of the S&P 500’s members either rise or fall, and the move comes as a rush in the final hour of trading.

Despite the uncertainty, strategists like Tom Lee are betting on a rally into the year end.

“Has a bear market started? We think not,” Lee writes. His S&P 500 target remains at 2325, which would put the benchmark index up 13% year-to-date.

For now, it seems stock market bulls are betting on a rally, but at the same time, it’s very much in doubt.

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