- Fundstrat’s Tom Lee said the selloff that sent stocks crashing in April probably won’t last until May.
- Super bullish forecasters pointed to five dovish signs from the Fed after Wednesday’s policy meeting
- This suggests that stock prices will end May on a higher note, predicted Lee.
The stock market selloff may be over, with five bullish signals from the Fed at its latest policy meeting setting the stage for a May rally, said Tom Lee, head of research at Fundstrat. It is said that there is.
In a video sent to Fundstrat clients on Wednesday, Lee pointed to a Federal Open Market Committee meeting in May that caused a brief rise in stock prices. Central bankers opted to keep interest rates steady and signaled a hike was unlikely, fueling bullish sentiment among traders.
“This leaves me in a situation where I am still confident that the stock market decline will end in April,” Lee said. “I think May will ultimately be the month of ups.
He points to five dovish signals central banks have given the market, suggesting the path forward for stocks is much brighter.
1. The Fed is slowing the pace of quantitative tightening.
Central bankers have said they will slow down the pace of balance sheet reductions, which is good for stocks. The Federal Reserve has cut more than $1 trillion from its balance sheet in an effort to tighten financial conditions and rein in inflation.
The central bank said in a statement that balance sheet reductions will slow from June to $25 billion a month from $60 billion.
2. Inflation rate is on the decline
Inflation exceeded expectations throughout the first quarter, and prices in the economy remain above the Fed’s 2% target. But inflation is trending lower overall, Lee said, with consumer prices rising 3.5% year-on-year in March, slowing from a peak of 9.1% in mid-2022.
In his prepared remarks, Powell added that he was confident that inflation would continue to decline this year toward the Fed’s long-term goals. Lee added that if disinflation continues, the Fed could have more room to cut rates in the second half of 2024.
3. Interest rate cuts can coexist with a strong labor market
Some investors are concerned about a strong labor market, as the Fed could raise interest rates to weaken an overly strong employment environment.
But Powell suggests that is not the case, Lee said. The Fed president said that while the labor market was “very tight” last year, economic growth remained strong and inflation remained low.
“A healthy labor market does not prevent us from cutting interest rates,” Lee said.
4. The economy is not facing stagflation.
Market participants are also paying close attention to the threat of stagflation, a phenomenon in which prices continue to rise while economic growth is sluggish. Concerns about this scenario began to grow as investors received better-than-expected inflation performance in the first quarter, while GDP in the first quarter was lower than expected.
But Powell seems “perplexed” about that possibility, Lee said, and the central bank chief pointed to the economy’s “robust” growth in a press conference. Other economists are also dismissing the risk of stagflation for now, citing continued strength in consumer spending and the job market.
5. Rate hikes are unlikely
Powell added that the Fed’s next action is unlikely to be a rate hike. That came as a relief to investors, as many have become concerned about further tightening as the economy continues to perform well this year and inflation heads in the wrong direction.
Investors are currently pricing in a 69% chance that the Fed will make one or two interest rate decisions by the end of the year, according to the CME FedWatch tool.
Stock investors are already betting that the Fed’s prospects for rate cuts this year are brightening. Stocks reacted positively to Wednesday’s Fed meeting. Meanwhile, nearly 40% of investors say they are bullish on stocks over the next six months, up from 32% of respondents the previous week, according to the latest AAII Investor Sentiment Survey.
