5 Reasons Stocks Have Bottomed With Upside Ahead

2022-04-11

  • It’s too easy to make a bear case for stocks in the face of inflation and a hawkish Fed, and that’s bullish, according to Fundstrat.
  • The research firm sees volatility ahead for the market, but expects more upside by year-end.
  • These are the 5 reasons Fundstrat believes the market already hit its bottom on February 24.

In the face of rising inflation, a hawkish, and the likelihood for further interest rate increases, everyone’s bearish on stocks, and that’s bullish, according to Fundstrat’s Tom Lee.

“Nobody [is] bullish + ‘bad news’ only way to avoid [a] ‘hard landing’ Fed yet, stocks [are] behaving as if February was [the] bottom,” Lee said in a Monday note.

The strategist highlighted that a declining stock market, a less bullish consumer, and economic shocks outside the US are doing a lot of the work for the Fed by helping tighten financial conditions.

These are the 5 reasons why stocks will likely not fall below their February 24 low of around 4,115 on the S&P 500, and why they likely have more upside ahead by the end of the year, according to Fundstrat.

1. “4 of 4 quantitative signals seen at bottom were generated in March 2022.”

Lee highlighted four quantitative stock market bottom signals that flashed in late February and early March. Individually, these signals are typically seen around major market lows.

“Since 1945, a cluster of 2+ of these signals [has been] seen 9 times…8 of [these] 9 times [were] buyable lows,” Lee said. The four S&P 500 indicators include up 1% four days in a row, nine consecutive 1% up days, a long streak in the VIX above the 30 level, and the S&P 500 regaining its 200-day moving average after being 6% below it.

The last time these four signals flashed around the same time was in April 2020, which was shortly after the stock market found its bottom amid the COVID-19

2. “Financial conditions tightened sharply, including higher borrowing costs.”

The recent stock market decline has already destroyed up to $15 trillion in household net worth and helped rein in financial conditions, essentially doing a lot of work for the Fed. “Sentiment has shifted massively negative, [and] bond markets have done a lot of the work for the Fed by pushing rates higher,” Lee explained.

This should temper consumers as the “wealth effect” kicks in, which is the idea that a perceived change in a consumers net worth will lead to a change in spending.

3. “US consumers already slowing non-gasoline spending.”

“Higher gasoline prices acts as a direct hit to consumer wallets.  Given this is in part fueled by US policy response to Russia-Ukraine war, it is arguably a ‘fiscal policy tightening’ — the hit to consumers is real-time as consumers pay for gasoline,” Lee said.

According to data from JPMorgan, US consumer spending is beginning to roll over, and gas prices could continue to take a toll on the wallet of consumers. “By slowing spending, this is already a sign higher gasoline is slowing the economy as the Fed is attempting to achieve by its policy measures,” Lee said.

4. “Europe facing a GDP shock from higher energy/commodities.”

Europe is poised for an economic slowdown due to Russia’s ongoing attack against Ukraine and surging commodity prices. “Again, the EU’s hit to its GDP growth is in part, doing some work for the Fed,” Lee said.

5. “China zero COVID-19 [policy] driving massive contraction.”

As China imposes economic lockdowns across major cities to try and contain the spread of COVID-19, a big decline in economic activity will be realized. That’s a big deal given that China is the second largest economy in the world.

“This again is slowing global growth and doing the work of the Fed,” Lee said.

Tighter financial conditions should help reduce demand, and in effect help slow down the rise of inflation. This would give the Fed more flexibility in its balance sheet reduction and interest rate hike plans, which could in-turn help risk assets.

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