Why Tom Lee and Mark Newton Are Bullish

Good Evening:

“You look at every bear market and they’ve always basically occurred because of an uptick in inflation and an uptick in interest rates.” – Paul Tudor Jones

The correction we’ve experienced this year fits Mr. Jones’ sentiment. Still, the enduring questions on the Street remain: What’s the Fed’s next move, and have we bottomed? Our Tom Lee and Mark Newton think we probably have after the S&P 500 rallied 10% from its lows as of Thursday, with a fresh wave of bullish momentum. Many of the factors that have added to volatility this year are old news, and the market might look forward from here. Signs of inflation peaking can allow for flexibility in Fed policy, with better-than-expected macro data supporting a sustained move higher in stocks.

“Everyone I talk to is pretty worried about markets,” Lee, our head of research, said this week. “They’re just worried because there’s still this issue of, ‘The Fed must crush inflation.’ But I think the key to watch is FAANG, and I think FAANG is better. We’re still stuck in the same place, but I think the risk/reward improved a lot. Whatever the Fed’s done, coupled with the market’s reaction, is already achieving a slowdown. The labor market is a lot softer than it appears. I think inflation is tracking below expectations, and I think the Fed may not have to go as far as people think.”

The Cost of Missing the Market’s Best Days

Amid the hubbub of war, inflation, interest rates, the Fed, and recession fears, investors would have been wise to stay invested: Last week, for example, was the market’s best since November 2020. It’s also an excellent market for stock pickers, as Adam Gould, our head of quantitative research, noted in his latest report. The Dow Jones index surged 6.2% for the week to snap an eight-week decline, its longest losing streak since 1932, while the S&P climbed 6.5% and the Nasdaq jumped 6.8%, both ending seven-week slides. The recent movement is historically bullish — previous corrections between 10-20% showed gains of nearly 25% on average a year later and nearly 40% two years later — but time will tell in the coming months.

Much depends on an investor’s risk profile and time horizon. But sitting on the sidelines could be the costliest mistake. Missing out on a few of the market’s best trading days can have a devasting impact on your returns. Some of the market’s best days happen fast and often come without warning. There’s no telling if we will flush lower later this month, but there’s also a risk in anticipating a recession that will never happen. As the adage goes, economists have predicted nine of the last five recessions. This aligns closely with Peter Lynch’s belief that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections.”

Here’s a simple example of the power of staying the course and sticking to your plan: Say you invested $10,000 in 1980 in an investment that tracks the S&P 500 Index. Had you stayed invested through March 2020, you would have endured many volatile periods, including in 1987, 2000-02, 2008, and March 2020, the fastest bear market in history because of the COVID-19 pandemic. Yet that initial $10,000 would be worth around $697,421 today, according to Fidelity. If you’d missed out on just the five best days over the same period, you’d have much less: $432,411. The lesson? Patience is a virtue. And staying invested helps many investors enjoy the big green days that drive the bulk of compounding. Over the long run, this approach has led to prosperity.

It’s All a Phase

The Stoics believed a large degree of human events and situations are simply phases that come and go. Our mood swings. Our life aspirations change. Our job or family life changes. And there’s maybe no greater example of this notion than markets. All they do is go through cycles and changes, one after the other. Fear follows euphoria on an almost endless loop. All of it is a phase. It’s a phase in the economy. It’s a phase in monetary policy. It’s a phase in that 2019, 2020 and 2021 were great years for markets, just as bear markets are phases. Now, it’s a phase that we’re amid this correction. This Stoic philosophy aligns with a key principle that our Tom Lee sticks to in any market environment: Understanding cycles is critical.

Many of the biggest mistakes happen in cycles: People extrapolate uptrends and downtrends into eternity, but trends usually regress to the mean. The longer an uptrend goes on, the more risk-tolerant and optimistic people become, just when they should be turning more cautious. 

When you’re pleased with your return and markets are surging, you must remind yourself it is a phase. And when you’re stressed, depressed, anxious, angry, losing hope, you must remind yourself of this too. All of it is a phase. No phase lasts forever. No bear or bull market lasts as long as the herd thinks it will. Equities go up, they go down. The top performers come and go. One year a stock or sector is in vogue, the next year it’s sold off 50%. Looking at markets (and life) with this perspective, we can bear them better. Marcus Aurelius, the Roman emperor, never knew when a phase would end – only that it would. Whether we’ve truly bottomed for the year remains to be seen, but we are sure of this: There are always opportunities on which to pounce, and this phase will come to pass.

Speaking of opportunities, our research heads met Thursday in New York to discuss markets. Here are three key takeaways:

1. Tom Lee: It all comes down to how the market sees inflation risk

Lee, who forecasted this “treacherous” first half of the year before a strong second half, said this week that “it all comes down to how the market sees inflation risk.”

“I think the key to markets stabilizing,” Lee added, “is for investors to believe we’re actually tracking toward the Fed’s target of getting inflation to fall. It’s not going down to 2% by the end of this year. But it’s really about the credibility of getting down to 4%, then achieving some level of equilibrium by the end of next year. The good news is that between the supply chain easing, there’s all this inventory in housing, retail, goods, and cars, and you’re already seeing demand destruction on goods because of price. I just think there’s a chance goods are going to be downside readings on CPI.”

2. Mark Newton: We’ve likely already bottomed

Newton, our head of technical strategy, says he’s turned more bullish in the last week for a few reasons, including: Structurally, markets look more sound on a short-term basis; Technology’s relative strength is encouraging; His cycle work suggests late June is important. “I think we rally into the late June Fed meeting then back off into late June,” Newton said. “It’s right to be long.”

Newton says we could rally to 4300 into the June Fed meeting, pull back slightly, then rip higher this summer and fall. He noted that the extreme bearish sentiment could be a buy signal, and he’s encouraged that about 70% of stocks are above their 20-day moving average, the highest levels of the year.

“This year we could potentially get back to new highs, which would be a crazy (good) fall, but I think that would be right,” Newton said. “4700 was my target, and I thought we’d hit 3815 before that. One day at a time. Two steps forward, one step back. I’m willing to be more optimistic.”

3. Sean Farrell: Bitcoin still in a good place for long-term investors

Bitcoin, a key part of our BEEF strategy, is trading at about 29,000-30,000, where it’s been parked for several weeks, down almost 40% YTD. “The macro-outlook is a little too cloudy for the immediate term in my view, but if your time horizon is longer than six months, this is a pretty good area to start piling in,” says Sean Farrell, our head of digital assets. “Set it and forget it. By a lot of metrics, Bitcoin is at levels that are seen around the depths of any bear market.”

These comments come the same week JPMorgan declared that Bitcoin “has significant upside from here,” and has become the firm’s “preferred asset” over real estate as an “alternate investment” while interest rates move higher. Investment in crypto technology shows no signs of slowing down despite the significant decline in the price of Bitcoin, a bullish signal for long-term investors in the space. Further, Andreesen Horowitz (a16z) announced a record-breaking $4.5 billion crypto fund. Founder Marc Andreessen sees parallels to Bitcoin and the internet, saying: “The only time I have ever said, ‘this is like the internet’ is this … I don’t take the comparison lightly. We could actually imagine the entire global economy running on the blockchain.”

Wishing everyone a restful weekend,

FSInsight Team