As it is Monday morning, I thought we could all do with a little bit of cheering up. The following is from a piece I was reading at the weekend on the ‘Markets Insider website.
Investors are so bearish on stocks that the market could see a potentially huge rally as the inflation situation improves, according to Fundstrat's head of research Tom Lee.
In a note on Monday, Lee pointed to strong bearish sentiment in the stock market, with 41% of investors saying they felt pessimistic on their outlook for stocks over the next six months, according to the latest AAII survey. Lee added that the majority of Fundstrat's institutional investor clients believed the S&P 500 would soon plunge by about 15% to retest its low in October of last year.
But that's contrary to bullish indicators that are flashing in the market, Lee said, largely due to inflation falling. He forecasted that the benchmark index would actually rise 14% to 4,750 over the next 12 months.
"Investor position is so negative, hard to cause further downside," he said, adding that less sticky inflation would resolve many of the issues that are turning investors so bearish.
Inflation has been on a slow but steady decline for nearly all of the past year, cooling to 4.9% in April's Consumer Price Index report. Though some economists have warned inflation could remain stubborn at 3-4%, Lee has made the case that prices could be set to see a steep drop due to falling indicators like housing costs.
Falling inflation is likely to give the Federal Reserve reason to dial back its tightening of monetary policy which could be bullish for equities.
Though investors are still skittish over recent banking turmoil, the debt ceiling crisis, and a potential corporate earnings recession, falling inflation should resolve many issues markets are fretting about, Lee said.
If you want to keep those positive thoughts for now, I probably wouldn’t read this last paragraph from the same article.
Other Wall Street strategists are still sounding that alarms for this year, with Bank of America warning that the economy could tip into recession as soon as this quarter. Lee, for his part, has been bullish on stocks for most of the past year's bear market, and previously predicted the S&P 500 to hit a new record last year, though the index ultimately notched its worst performance since 2008.
As the famous baseball catcher and later manager, Yogi Berra once supposedly said, "It is difficult to make predictions, especially about the future."
Have a good week everyone.
I hope you have found this interesting but, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
