Tom Lee has been serving to skilled hedge fund cash managers navigate bull and bear markets because the Nineties. He was among the many few who accurately known as for a inventory market rally this 12 months, making him value listening to.
He provided up his newest tackle what’s subsequent for shares on Aug. 8, suggesting one large occasion might trigger an enormous transfer greater in shares. Here’s what Lee is watching and why he thinks markets might see extra upside.
Expectations have shifted, establishing this upside alternative
Inflation was sky-high in 2022 due to post-covid demand from stimulus, low charges, and provide chain disruptions. For instance, the CPI inflation report confirmed costs grew 9.1% year-over-year in June 2022.
It’s been a special story this 12 months.
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In June 2023, year-over-year inflation retreated to three% following a sequence of Fed Funds Rate will increase and fewer provide chain issues. The most important price declines have been resulting from decrease commodity costs, together with oil and fuel.
The bettering inflation image has supported shares, contributing to double-digit positive aspects for the S&P 500. However, a latest uptick in commodity costs has elevated worries inflation will rise once more, inflicting shares to tug again since mid-July.
Stocks’ retreat might be short-lived, in keeping with Lee. While others anticipate inflation to select up, Lee is not satisfied.
His analysis means that core CPI can be cooler than predicted, doubtlessly main those that offered shares due to inflation worries to develop into consumers once more.
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Lee’s analysis means that July’s month-over-month improve in core inflation can be a comparatively tame 0.15%. That’s under Wall Street’s 0.22% consensus estimate and much under the Cleveland Fed’s Nowcasting goal of 0.40%.
“The problem with the Cleveland Fed forecast model is it is a relatively simple 9 variable model that uses gasoline plus the prior month’s CPI forecast to forecast July,” wrote Lee in a publish on Real Money Pro.
Lee’s outlook for cooler inflation is because of decrease auto and shelter prices. Auto and shelter accounted for two-thirds of the rise in core CPI since 2019, in keeping with Fundstrat. In June, shelter alone represented 70% of the rise in headline CPI, in keeping with the Bureau of Labor.
That’s vital as a result of the calculation for shelter prices displays historic lease charges fairly than present marketed rents. As leases renew, the shelter element of CPI ought to play catch up, eradicating a serious headwind that is conserving inflation excessive.
The July CPI information can be reported on Aug. 10. If Lee is appropriate, a decline in shelter might spark a rally.
“In our view, this positive surprise would be more than enough to offset the “tape bombs” that rattled markets on Tuesday. And we also think it is enough of a surprise for stocks to recover their losses from Tuesday and even possibly from earlier in August,” wrote Lee. “BOTTOM LINE: We think the fundamental catalyst of CPI likely triggers a sizable recovery in stocks.”
Sign as much as see what shares we’re shopping for now
Source: www.thestreet.com”