The stock market’s “buy the dip” regime has returned after a bear market touched more than 70% of stocks, according to Fundstrat’s Tom Lee.
There have only been three times since 1995 that stocks have been more oversold than they were in June.
Lee gave 5 reasons why he expects the stock market to stage a strong rally in the second half of 2022.
Since 1995, the extreme reading of 73% of stocks being more than 20% off their 52-week highs was only eclipsed by the dot-com bubble lows in 2003, the March 2009 lows amid the Great Financial Crisis, and the March 2020 lows amid the onset of the COVID-19 pandemic.
“A lot of bad news is priced in,” Lee said in a Wednesday note to clients, adding that any reading of over 54% of S&P 500 stocks being in a bear market has historically proven to be a great time to buy the dip in stocks.
Since 1995, when more than 54% of the S&P 500 components were in a bear market, the stock market went on to experience strong 3-month, 6-month, and 12-month forward returns of 7.6%, 11.3%, and 20%, respectively, according to Fundstrat. Those return periods also experienced high win ratios of at least 70%.
Now is “arguably [the] single best time to start buying the dip,” Lee said.
And Lee’s argument that now is a good time to buy stocks lines up with his view that the stock market is poised for a strong rally to new record highs in the second half of this year.
Lee offered the following 5 reasons as to why investors can be constructive on the market from here.
1. “Inflation proves to be less sticky.”
2. “Economic resilience is better than feared (‘growth scare’ not recession).”
3. “US economic dominance gained in 2022.”
4. “Bad news is baked into equity valuations.”
5. “Cash is on the sidelines.“
A perceived headwind for the stock market going forward is the Fed’s current trajectory of raising interest rates, which can last into year-end or even early 2023. But the Fed raising rates is not a binary impact that means stocks have to fall, according to Lee.
“The key is whether the Fed will negative ‘shock’ markets,” Lee explained. After June’s Fed meeting, the bond market has gotten ahead of the Fed in anticipating when it will reach a neutral interest rate, and that means there is likely little-to-no shock left by the Fed in the current regime of raising rates.
“Ultimately, the key divergence between our sanguine view and consensus is whether the US is tracking towards a recession (consensus) or a growth scare. In our view, recent incoming data and even second-quarter EPS season support a ‘growth scare’ scenario,” Lee concluded.
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