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The selloff that hit stocks in April likely won’t extend into May, according to Fundstrat’s Tom Lee.
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The ultra-bullish forecaster highlighted five dovish signs given by the Fed after its policy meeting on Wednesday.
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That suggests stocks will end May with a gain, Lee predicted.
The stock market sell-off may be over, and five bullish signals from the Fed at its latest policy meeting are setting the stage for gains in May, according to Tom Lee, head of research at Fundstrat.
In a video sent to Fundstrat clients on Wednesday, Lee highlighted the May Federal Open Markets Committee meeting, which sparked a brief rally in stocks. Central bankers opted to keep interest rates level and suggested a rate hike was unlikely, fueling bullish sentiment among traders.
“This brings us to a situation where I am still convinced that April will mark the end of this sell-off,” Lee said. “I think May will end up being a positive month.
He highlighted five dovish signals the central bank has given to markets, which suggest the path forward for stocks looks much more promising:
1. The Fed slows down the pace of its quantitative tightening
Central bankers have said they will slow the pace of their balance sheet reductions, which is positive for stocks. The Fed has paid more than a billion of its balance sheet in order to tighten financial conditions and help control inflation.
Balance sheet reductions will slow from $60 billion to $25 billion per month starting in June, the central bank said in a statement.
2. Inflation tends to fall
Inflation has been higher than expected throughout the first quarter, and prices in the economy still remain above the Fed’s 2% target. But inflation is falling overall, Lee said: Consumer prices rose 3.5% year-on-year in Marchdown from the peak growth of 9.1% recorded in mid-2022.
In his prepared remarks, Powell added that he was confident inflation would continue to fall this year toward the Fed’s long-term goal. Continued disinflation could give the Fed more room to cut rates later in 2024, Lee added.
3. Rate cuts can coexist with a strong labor market
Some investors were concerned about robust job marketbecause the Fed could raise interest rates to weaken overly strict hiring conditions.
But Powell suggested that wouldn’t be the case, Lee said. The Fed chief noted that the labor market was “very tight” last year, but the economy still saw inflation fall while growth remained strong.
“A healthy labor market does not preclude rate cuts,” Lee said.
4. The economy is not facing stagflation
Market participants have also been alert to the threat of stagflation, a phenomenon in which prices continue to rise while economic growth remains sluggish. Fears of such a scenario began to grow as investors reacted more than expected…
