Falling Inflation Still Points to 20% Gain in Stocks Despite Hawkish Powell

• Shares are nonetheless set for a 20% acquire this yr because of falling inflation, Fundstrat’s Tom Lee mentioned.
• Lee made the case for a rally regardless of Powell’s hawkish testimony prior to Congress on Tuesday.
• Markets predict upper charges, however inflation expectancies have not modified, which is excellent news for shares.

The rally in shares is not going to be derailed by way of a hawkish Federal Reserve, as falling inflation nonetheless elements to a 20% acquire for the marketplace this yr, in keeping with Fundstrat’s head of study Tom Lee.

In a notice on Wednesday, Lee reiterated his bullish view on shares regardless of Fed Chairman Jerome Powell’s hawkish testimony prior to Congress on Tuesday. The highest central banker warned that charges would most likely want to stay emerging, inflicting buyers to lift their expectancies for a 50 basis-point price hike in March and spurring a sell-off in shares.

Already, central bankers have raised rates of interest 450 basis-points to take on emerging inflation, a transfer that weighed closely on shares remaining yr and despatched the S&P 500 decrease 20%. 

However the hawkish feedback have not modified the full trajectory of shares this yr, Lee mentioned, as inflation remains to be coming down, which issues extra for equities.

“This testimony isn’t in point of fact converting anything else because the Fed exact trail is a serve as of what occurs with inflation,” Lee mentioned. “The ahead trail of inflation, in fact, isn’t but identified however the main signs display long term development is within the works.”

Fed officers have flashed hawkish alerts after seeing sizzling inflation signs in January, comparable to new payrolls, which beat economists’ expectancies. However that knowledge is most likely distorted because of lags within the reputable statistics, Lee mentioned. Extra well timed figures, comparable to knowledge from process checklist websites like Linkup and Certainly, display round a million fewer process openings than the reputable jobs record – an indication the economic system is already beginning to cool off from the Fed’s competitive financial coverage.

In the meantime, six and 12-month inflation expectancies in reality fell after Powell’s testimony, an indication markets are nonetheless anticipating inflation to proceed on its downward trail. 

Falling inflation will have to quell marketplace volatility, which has traditionally resulted in sure returns for shares, Lee mentioned. He predicted the CBOE Volatility Index to development underneath 20 this yr, which might purpose shares to achieve some other 20% from present ranges.

Lee has been bullish on equities for months, and up to now predicted the S&P 500 to retest an all-time-high in 2022, although the inventory index in reality closed the yr 20% decrease. He made the case that shares may just see their most powerful rally of the yr thru March and April, and instructed buyers to purchase the dip in equities.