‘Buy the Dip’ is back as 5 reasons will spark a rally
- According to Fundstrat’s Tom Lee, the stock market’s “buy the dip” regime has returned after a bear market hit more than 70% of stocks.
- There have only been three times since 1995 that stocks have been more oversold than they were in June.
- Lee gave 5 reasons why he expects the stock market to stage a strong rally in the second half of 2022.
The “buy the dip” regime in stock markets returned after a bear market hit 73% of S&P 500 stocks in June, according to Fundstrat’s Tom Lee.
Since 1995, stocks’ extreme 73% reading at more than 20% from their 52-week highs has only been eclipsed by the dot-com bubble lows of 2003, March 2009 lows amid the Great Financial Crisis. and March 2020 lows amid the onset of the COVID-19 pandemic.
“A lot of bad news is priced in,” Lee said in a Wednesday note to clients, adding that any reading of more than 54% of S&P 500 stocks in a bear market has historically proven to be a good one. time to buy the drop. shares.
Since 1995, when more than 54% of the S&P 500 constituents were in a bear market, the stock market has posted strong 3-month, 6-month and 12-month forward returns of 7.6%, 11.3% and 20 month. %, respectively, according to Fundstrat. These return periods also had high success rates of at least 70%.
Now is “no doubt [the] best time to start buying the dip,” Lee said.
And Lee’s argument that now is the time to buy stocks aligns with his view that the stock market is poised for a strong rally to new highs in the second half of this year.
Lee offered the following 5 reasons why investors can be constructive in the market from here.
1. “Inflation is proving less sticky.”
2. “Economic resilience is better than feared (“fear of growth” not recession).”
3. “American economic dominance gained in 2022.”
4. “Bad news is priced into stock valuations.”
5. “The money is on the sidelines.“
A perceived headwind for the stock market going forward is the Fed’s current path of raising interest rates, which may last until the end of the year or even early 2023. But the Fed’s rate hike is not a binary impact that means stocks must fall, according to Lee.
“The key is whether the Fed will negatively ‘shock’ the markets,” Lee explained. After the June Fed meeting, the bond market moved ahead of the Fed in anticipation of when it will reach a neutral interest rate, meaning there is likely little to no shock left by the Fed in the current regime. rate hike.
“Ultimately, the main divergence between our optimistic view and the consensus is whether the United States is headed for recession (consensus) or growth scare. In our view, recent incoming data and even the second-quarter EPS season support a ‘growth scare’ scenario,” Lee concluded.