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Investors should “stay focused” and continue to own stocks heading into the end of the year, Fundstrat’s Tom Lee said.
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Lee cites declining margin debt and a dovish Fed as key reasons to be bullish on stocks.
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“We’ve only seen peaks when margin debt really starts to rise,” Lee said.
Investors should “stay the course” and continue to own stocks through the end of the year, Fundstrat’s Tom Lee said.
In a note to clients on Wednesday, Lee gave three reasons why he expects the stock market to finish the year strong despite the uncertainty surrounding November’s presidential election.
“The message is stay the course and know that the firepower is still there,” Lee said.
The “firepower” refers to the fact that FINRA margin debt fell to $797 billion in August, well below the peak of $936 billion in October 2021.
FINRA margin debt measures the amount of borrowing investors take out to buy stocks. The indicator has a history of rising and falling with the stock market, and Lee says there is still room for margin levels to rise, suggesting stock prices could see more gains.
“We’ve only seen peaks when margin debt really starts to rise,” Lee said.
According to Lee, the potential rise in margin debt coincides with a Federal Reserve that has adopted a dovish policy stance, which should be supportive for stock prices.
Lee analyzed the numbers and found that the S&P 500 has performed strongly since 1971, when the Fed began cutting interest rates while the economy was still strong.
According to Lee, there have been seven instances where the Fed’s rate cuts coincided with a “no landing” in the economy. The stock market returns over the next three and six months have a 100% gain, with average returns of 8% and 13%, respectively.
That bodes well for stock prices, which will continue to hit record highs through the end of the year.
“Don’t fight the Fed,” Lee said.
Finally, Lee pointed out that the S&P 500 typically delivers strong gains in the second half of the year, after gaining 10% in the first half of the year.
The S&P 500 rose 14% in the first half of 2024, suggesting this.
The data shows that under such conditions, the S&P 500 has delivered an average second-half gain of 9.8% since 1950, with a gain rate of 83%.
“The only bad years were the hawkish years of Volcker. But now the Fed is dovish,” Lee said.
He added: “In short, stay constructive.”
Read the original article on Business Insider
