Fundstrat’s Tom Lee is still super bullish.
In a “State of the Market” note Tuesday, Lee says the stock market has had its “March 2009” moment.
That month marked the lowest level of the 17-month bear market in stocks during the financial crisis. The Dow bottomed on March 9, 2009 at 6507.04.
It’s up 173% since then, but has had it’s ups and downs, including the recent corrections that happened in September and January.
Lee said that mid-February, when stocks fell to the lowest point of this year, marked an inflection point in the global economy. Many gauges of manufacturing improved, and risky assets across the board rose.
As to why, it is not entirely explainable but in retrospect, the period from August 2015 to February 2016, was a “bear market” even though the S&P 500 did not statistically fall 20%. We realise many investors look to the remainder of 2016 with apprehension, however, we believe equity markets are poised to make new highs in coming months.
He outlined four things that could drive stocks to new highs before the fall.
First, he anticipates a recovery in sales and earnings, as the adverse effect of the strong dollar on corporate earnings reduces.
The dollar’s 10% jump last year subtracted about $93 billion, or $10 per share from S&P 500 company earnings, he calculates. But this year, more companies should report sales gains as the dollar’s drag fades.
Second, Lee says the imbalance between oil supply and demand keeps getting closer to equilibrium every month. Later in April, a meeting between OPEC and non-OPEC members could produce an agreement on output cuts, although Saudi Arabia has threatened to abstain unless Iran gets on board.
Third, Lee notes the high levels of short interest in stocks, or investors’ bets against their advance. He says the level of short interest — 4.3% of float — tops the levels seen in March 2009 when stocks bottomed.
“From March 2009 to September 2009, short interest fell by 90bp and equities rose 50% in those 6 months,” he said. “That is the equivalent of reducing short interest today to late 2014 levels.”
Also, Lee expects the US consumer to remain a “bright spot” in the economy.
He says the biggest risks to this call for new highs by the summer include a global recession and a spike in credit defaults.
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