US stocks could rise another 25% as the Fed no longer has its back to the wall in the fight against inflation.


One of Wall Street’s most uncompromising bulls laid out his argument that he thinks U.S. stocks can continue to rise through the end of the year after Thursday’s game-changing October inflation data.

Fundstrat’s head of research, Tom Lee, said in a note to clients on Friday that while “inflationists” suspect a repeat of October’s softer-than-expected inflation reading, Fundstrat sees three reasons why the latest inflation report could be a turning point. In the Federal Reserve’s struggle to quell price pressures.

See also: Inflation in the US is simmering, but it will take more time to cool down down

These reasons included a “meaningful slowdown” in the consumer price index during the month, a “whiplash” reversal in durable goods inflation and a decline in the cost of health insurance.

Lee explained his reasoning as follows:

  • “Shelter finally showed a meaningful slowdown in CPI MoM as OER (owner equivalent rent, >23% of CPI basket) to +0.6% (+0.7%/+0.8% Aug/ September) and the market trended towards deflationary reality. apartment.”

  • “Durables finally showed a ‘whiplash’ comeback as CPI for durables fell -0.7% MoM (-8.4% y-o-y) and even used cars finally showed some weakness for the month – 2.4% (but still set to fall 15% more) .

  • “Medical insurance fell from +2.4% trailing 12 months (since October 2021) to -4% MoM, and on an annualized basis, will decline 40% over the next 12 million.”

That’s a sign that inflation will “decelerate massively” in the coming months, Lee said, adding that if all goes well, the U.S. economy could see the “three-to-four-month” core CPI rise 0.3% for the month. month

Core inflation, which excludes food and energy costs, slowed to 0.3% in October, below Wall Street expectations for a 0.5% rise.

The most important takeaway from October’s inflation data is that the Fed no longer has its “back to the wall,” which could allow it to ease the pace of rate hikes more significantly, Lee said. Finally, he noted, “the case for a break after December is stronger.”

Market analysts were looking for signs that the Fed could either halt aggressive rate hikes or even move to cut rates, as Wall Street believes that would help stem bear markets in both stocks and bonds. this year.

The Fed has raised Wall Street’s benchmark federal funds rate by 3.75 percentage points since the start of the year, including four consecutive “jumbo” hikes of 75 basis points, including one earlier this month.

Lee said that even if the Fed currently keeps rates above 5%, a move from “immediately higher” to “predictable but perhaps longer-term” would be more favorable for stock valuations.

According to CME’s FedWatch tool, Fed funds rate traders expect the rate to reach 5% in March and remain there at least through the fourth quarter of 2023.

Softening inflation could also help stocks by averting a deep recession and increasing the chances that the Fed can steer the US economy toward a “soft landing,” Lee said.

Lee and his team said this latest rally could last up to 50 days and could help the S&P 500 rally by 25% more as investors accept that the worst of the Fed’s rate hikes are over and that the central bank is likely. take a break from these departures at the beginning of next year.

Finally, the S&P 500 should be able to break above its 200-day moving average around 4,100. If investors get another soft CPI report in December, the broad index could even reach the 4,400-4,500 range.

FUNDSTRAT

Lee, who is sometimes described as “permanent,” held off on his bullish view on the stock for much of the first half of 2022, but admitted in March that he was “very bullish” as he continued to make his case for why the stock’s valuations look attractive.

US equity indexes saw their best session in more than two years on Thursday as the S&P 500 SPX.
+0.00%
The Nasdaq COMP rose more than 5.5%.
+49.76%
approximately 7.4% and the Dow Jones Industrial Average DJIA,
-0.78%
He scored more than 1200 points. Stocks will open higher and add to those gains on Friday.



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