Fundstrat's Tom Lee: Fed cuts set up strong markets next few months but election uncertainty remains
Summary
TLDRIn a discussion on CNBC, Tom Lee, Head of Research and CNBC contributor, maintains his S&P 500 target of 5200, highlighting a recalibration period for investors. He anticipates strong market performance over the next one to three months due to the Fed's rate cuts, which could boost cyclical stocks like industrials, financials, and small caps. However, he advises caution before the election due to lingering uncertainties. Lee also addresses concerns about inflation, suggesting that real GDP growth doesn't necessarily imply inflationary pressures, and notes potential excess supply in sectors like housing. He expects labor market tailwinds as companies may expand in the easing rate cycle.
Takeaways
- 📈 Stocks are rallying due to Federal Reserve cuts, indicating a positive market response to recent economic measures.
- 🎯 Tom Lee, Head of Research at Fundstrat and CNBC contributor, maintains a target of 5200 for the S&P 500, suggesting confidence in a specific market index.
- 🔄 There's a call for investors to recalibrate their strategies, reflecting a shift in economic forecasts and market conditions.
- 🚀 The Fed cut cycle is expected to bolster market strength in the short term, particularly over the next one to three months.
- ❓ Despite the positive outlook, there's hesitancy regarding investment before the election due to lingering uncertainties.
- 🏭 A preference is suggested for cyclical stocks, including industrials, financials, and small caps, over traditional tech and MAG 7 stocks.
- 💼 The easing cycle may encourage companies to expand, potentially strengthening the labor market.
- 📉 Inflation is a concern; however, there's an argument that real GDP growth doesn't necessarily equate to inflationary pressures.
- 🏠 The housing market could see a supply response, which might affect inflation rates, especially considering past inflation drivers like shelter and rent rolls.
- 💼 Labor market discussions highlight the potential for a faster pace of rate cuts, influenced by the argument that monetary policy changes have a delayed impact on the labor sector.
Q & A
What is the current market sentiment according to the discussion?
-The market sentiment is cautiously optimistic due to the Fed cuts, with stocks rallying, but there is still uncertainty regarding the market's performance leading up to the election.
What is Tom Lee's target for the S&P 500 index?
-Tom Lee maintains his target of 5200 for the S&P 500 index.
What does Tom Lee suggest investors recalibrate their expectations about?
-Investors should recalibrate their expectations regarding the economy's hard landing and the Fed's responsiveness, as the Fed cut cycle is setting the stage for market strength in the coming months.
Which sectors does Tom Lee recommend investors position in currently?
-Tom Lee advises investors to position in cyclicals, which include industrials, financials, and small caps, as they are expected to benefit from the cyclical boost to the economy.
What is Tom Lee's stance on the traditional MAG 7 tech and A.I. buildout trade?
-Tom Lee believes that tech and MAG 7 should keep up with the market, and he wouldn't advise selling these positions.
How does Tom Lee view the potential impact of the Fed's actions on small caps?
-Tom Lee sees the Fed's actions as creating tailwinds for small caps through factors like lower mortgages, auto loans, credit cards, and potential M&A activity.
What is the main risk factor Tom Lee identifies for the cyclical recovery?
-The main risk factor identified by Tom Lee is the potential return of inflation, which could undermine the cyclical recovery driven by the Fed's actions.
How does Tom Lee differentiate between GDP growth and inflation pressures?
-Tom Lee differentiates GDP growth from inflation pressures by stating that GDP growth does not necessarily mean inflation pressures, as inflation is a result of a mismatch between supply and demand.
What are Tom Lee's thoughts on the future of inflation based on the current economic indicators?
-Tom Lee believes that unless the rest of the economic basket accelerates, inflation is likely to fall sharply, as there is potential for excess supply, particularly in housing.
How does Tom Lee perceive the impact of the easing cycle on the labor market?
-Tom Lee thinks that the easing cycle will lead companies to start expansion, which in turn will create tailwinds for the labor market to strengthen.
What is Tom Lee's opinion on the labor market's response to the Fed's monetary policy changes?
-Tom Lee suggests that the labor market has its own cycle and that the Fed is likely mentally knocking down the monthly numbers, indicating a cautious approach to the labor market's response to monetary policy changes.
Outlines
📈 Stock Market Outlook Amid Economic Uncertainty
The paragraph discusses the stock market's reaction to Federal Reserve cuts, with an expert, Tom Lee, maintaining a target of 5200 despite economic concerns. He suggests a recalibration is needed as the market is expected to be strong in the short term due to the Fed's actions. However, there is hesitancy to add risk due to uncertainties leading up to the election. Lee advises investors to consider cyclical stocks, such as industrials, financials, and small caps, over traditional defensive positions, as these are poised to benefit from economic boosts like lower mortgage rates and potential M&A activity. He also addresses the risk of inflation returning but explains that inflation is driven by supply and demand mismatches, not necessarily by GDP growth. Lee points out that there is potential for excess supply in areas like housing, which could counteract inflationary pressures.
Mindmap
Keywords
💡Economy
💡Stocks
💡Fed Cuts
💡Cyclical Stocks
💡Risk
💡Inflation
💡Supply and Demand
💡Mortgages
💡Labor Market
💡Monetary Policy
💡Expansion
Highlights
Stocks are rallying due to the Fed cuts.
Tom Lee, Head of Research at Fundstrat and CNBC contributor, maintains his S&P 500 target of 5200.
The Fed cut cycle is setting the stage for strong market performance in the next one to three months.
There is uncertainty in the stock market leading up to Election Day.
Cyclical stocks, including industrials, financials, and small caps, are advised for investment positioning.
Tech and MAG 7 are expected to keep up with the market, so there's no need to sell.
Investors who were defensive should consider allocating into cyclical stocks for economic boost.
Lower mortgages, auto loans, and credit cards, along with potential M&A, are tailwinds for small caps.
The risk of inflation returning is a concern in a cyclical recovery due to Fed actions.
GDP growth does not necessarily mean inflation pressures due to supply and demand mismatch.
Excess supply, such as in housing, could be a response to inflation.
Shelter, rent rolls, and auto insurance have been the biggest drivers of inflation.
Auto insurers may have reached deficiencies, which could impact inflation rates.
Inflation is expected to fall sharply unless other areas of the basket accelerate.
Labor market conditions will be closely watched before the November Fed meeting.
Doves argue that labor market changes could force a faster pace of rate cuts.
CEOs have been cautious due to the Fed's previous tightening cycle.
Easing cycle may lead to companies starting expansion and strengthening labor markets.
The Fed is likely discounting monthly labor market numbers as they focus on long-term trends.
Transcripts
WE'RE SPOOKED BY THE ECONOMY OR
THE FORECAST.
>> STEVE, THANKS.
WHAT A DAY.
STOCKS ARE RALLYING ON THE BACK
OF THE FED CUTS.
HEAD OF RESEARCH AND CNBC
CONTRIBUTOR TOM LEE JOINS US ON
THE PHONE STICKING WITH HIS TAR
GET OF 5200.
YOU AGREE THE CYCLE HAS STARTED
AND THERE'S A FED PUT IN PLACE
BUT IT DOESN'T SOUND LIKE YOU'RE
WILLING TO ADD A LOT MORE RISK.
>> GOOD MORNING, CARL.
THANKS FOR HAVING ME.
CARL, I'VE GOT, I THINK, TWO
TIME FRAMES.
I THINK WHAT STEVE SAID ABOUT
THE RECALIBRATION IS REALLY
IMPORTANT BECAUSE I THINK
INVESTORS ALSO NEED TO
RECALIBRATE.
THERE ARE TOO MANY THAT WERE IN
THE CAMP OF A HARD LANDING
COMING OR THE FED WOULD BE TOO
LATE.
AND THE FED CUT CYCLE IS SETTING
THE STAGE FOR MARKETS TO BE
REALLY STRONG OVER THE NEXT ONE
MONTH OR THREE MONTHS.
BUT WHAT THE STOCKS DO BETWEEN
NOW AND THE ELECTION DAY IS
STILL A LOT OF UNSECERTAINTY
THAT'S WHY I'M HESITANT FOR
INVESTORS TO DIVE IN.
IF I WAS GOING TO ADVISED WHERE
TO BE POSITIONED, CARL, IT'S
EXACTLY WHAT YOU SAID.
IT'S CYCLICALS WHICH IS
INDUSTRIALS, FINANCIALS AND
SMALL CAPS.
>> WHICH A PREFERENCE FOR THAT
OVER YOUR TRADITIONAL MAG 7 TECH
A.I. BUILDOUT TRADE?
>> I THINK TECH AND MAG 7 STILL
KEEPS UP WITH THE MARKET.
THAT'S WHY SOMEONE WHO OWNS IT,
I WOULDN'T SELL IT.
FOR ALL THESE FOLKS THAT HAVE
BEEN SITTING ON DEFENSIVE
POSITIONS OR THINKING THE FED
CUT WAS GOING TO BE TOO LATE AND
THE MARKET WAS GOING TO --
EQUITY MARKETS WERE GOING TO
FALL, I THINK THOSE FOLKS HAVE
TO ALLOCATE INTO CYCLICAL
STOCKS.
THEY'RE GOING TO BENEFIT TO THE
CYCLICAL BOOST TO THE ECONOMY.
MORTGAGES DROP, AUTO LOANS,
CREDIT CARDS, POTENTIAL M&A, ALL
OF THESE ARE BIG TAILWINDS FOR
SMALL CAPS.
>> THE RISK TO THIS, TOM, IS
INFLATION COMES BACK, RIGHT?
IF YOU'RE TALKING ABOUT THIS BIG
CYCLICAL RECOVERY BECAUSE OF
WHAT THE FED'S DOING.
>> THAT'S TRUE.
I THINK ONE THING INVESTORS HAVE
TO DISTINGUISH IS REAL GROWTH,
GDP GROWTH, DOESN'T MEAN
INFLATION PRESSURES BECAUSE
INFLATION IS A MISMATCH OF
SUPPLY AND DEMAND.
I THINK THERE IS A LOT OF EXCESS
SUPPLY POTENTIALLY COMING, FOR
INSTANCE, HOUSING COULD HAVE A
SUPPLY RESPONSE.
IF YOU LOOK AT THE TWO BIGGEST
DRIVERS FOR INFLATION FOR THE
PAST -- ALMOST FOR THE PAST
EIGHT QUARTERS IT'S BEEN
SHELTER, RENT ROLLS AND AUTO
INSURANCE.
AUTO INSURANCE, I THINK THESE
INSURERS HAVE REACHED DWIS
DEFICIENCIES.
UNLESS THE REST OF THE BASKET
ACCELERATES, INFLATION IS
FALLING PRETTY SHARPLY.
>> TOM, ON THE LABOR MARKET,
WE'LL GET TWO PRINTS BEFORE THE
NOVEMBER MEETING.
SOME OF THESE DOVES ARE ARGUING
THAT LABOR IS GOING TO FORCE A
FASTER PACE OF CUT BECAUSE THEY
ARGUE THE CHANGE IN MONETARY
POLICY DOESN'T GET FELT IN THE
LABOR MARKET FOR FOUR QUARTERS
AND THE PEAK IMPACT IS NOT FOR
EIGHT QUARTERS.
I WONDER IF YOU AGREE?
>> I DON'T THINK THERE'S
ANYTHING WRONG WITH PEOPLE
LOOKING AT THE HISTORY OF LABOR
MARKETS, ESPECIALLY AS LABOR
MARKETS SLOW, IT HAS A CYCLE OF
ITS OWN.
THE ONE THING WE HAVE TO KEEP IN
THE BACK OF OUR MIND IS CEOs
HAVE BEEN CAUTIOUS BECAUSE THE
FED TELEGRAPHED A TIGHTENING
CYCLE TO FIGHT INFLATION.
I THINK THE FACT THAT RATES AND
NOW WE'RE IN AN EASING CYCLE
MEANS COMPANIES WILL START DOING
EXPANSION.
I THINK THE LABOR MARKET AND THE
FED IS MENTALLY KNOCKING DOWN
THESE MONTHLY NUMBERS.
I THINK TAILWINDS FOR LABOR
MARKETS TO STRENGTHEN.
>> ALL CLAIMS WOULD BACK YOU UP
TODAY
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