Buy Stocks As Consensus Panics About Fed Rate Hikes
- Investors should do the opposite of consensus and buy stocks, according to Fundstrat’s Tom Lee.
- Bearish sentiment has taken over the stock market in recent weeks as interest rates move higher.
- “Markets seem far more prone to panic today compared to the 30 years I have been following markets,” Lee said.
Investors should do the opposite of what the crowd is doing and buy stocks as the
Fundstrat’s Tom Lee said in a note on Wednesday.raises rates,
Bearish sentiment has taken over the stock market in 2022, as evidenced by the most recent results from AAII’s weekly investor sentiment survey. Nearly 60% of respondents were bearish on the stock market, which is the highest level since March 2009 at the depths of the Great Financial Crisis.
But the market may be overlooking an important trend that points to upside for stocks, and Fundstrat points out that a rally has occurred after five of the last six meetings of the Federal Open Market Committee.
“Markets seem far more prone to panic today compared to the 30 years I have been following markets,” Lee said.
It’s hard for investors to get bullish on stocks right now when the Federal Reserve is set to raise interest rates by 50 basis points later today in a bid to tame inflation. But Lee believes the bond market has already done a lot of work for the Fed given the sharp increase in interest rates despite minimal rate hikes by the Fed so far.
“Prone to panic in 2022, the market now is convinced that the Fed [is] ‘gonna break’ the market… [but] we are less panicked because [the] Bond market [is] doing work for [the] Fed,” Lee said, highlighting the fact that the 10-year US Treasury yield has spiked 130 basis points while the Federal Funds Rate has increased by only 25 basis points.
“The bond market is tightening financial conditions dramatically. This is doing the work of the Fed. We think this means the hawkish pivot by Fed will show up in financial conditions, therefore [the] economy, far sooner. Hence, since the bond market has panicked, the Fed has less work to do,” Lee explained.
And while the Fed raising interest rates by 50 basis points on Wednesday would be the first half percentage point increase since 2000, Lee notes that stocks have rallied after five of the last six FOMC meetings, with stocks jumping as much as 9%.
“Given the huge decline in stocks into this May FOMC, we think odds favor an outcome similar to the 5 rallies = stocks could bounce in May,” Lee said.
On top of that, stocks still remain attractive as an investment relative to bonds, reinforcing the years long TINA trade, or there is no alternative (to stocks). “We think stocks remain the best risk/reward for the next five years,” Lee said.
To add perspective to the relative opportunities between stocks and bonds, Lee highlighted that from 1990 to 2008, the S&P 500 had an average price-to-earnings ratio of 18x, similar to today’s, while the 10-year treasury yield averaged 5.3%, which is significantly higher than today’s treasury yield of 2.9%.
“There is a whole lot of room for yields to rise. But arguably, the S&P 500 price-to-earnings ratio is already at levels associated with a 5.3% 10-year. In other words, a lot of bad news is priced in,” Lee concluded.