I wanted to highlight Tom Lee's "6 Reasons the market bottomed in October" and simplify it for those of you who aren't familiar with the language...Let's get started.
"Markets bottom before fundamentals 80% of the time, and S&P 500 P/E (2024) is 15x ex-FAANG," Lee said. "This is hardly expensive. In fact, among the most expensive sectors are defensives like Staples (19.6x), Utilities (17.5x), and Healthcare (16.7x)." Tom Lee
Let's simplify this statement......The Bears argue the S&P 500 is just too expensive at an 18.5 P/E (Price to earnings ratio). Tom is arguing if you take out FAANG (META, AAPLE, AMZN, NFLX, GOOG), it's actually cheap (15 P/E)
Here are Tom's six reasons why the stock market has already bottomed in this bear market cycle. He sees a 2023 year-end S&P 500 price target of 4,750. 🤔
1 Peak Inflation
1) This one's pretty simple, Bear Markets bottom when Inflation peaks, and that's exactly what we're seeing. From June 2022 to March 2023, Inflation has almost cut in 1/2. This should continue...
2 Risk Appetite
2) This can be confusing for beginners and seasoned investors (including myself). Tom is making the point that Investors' appetitive for risk has and is improving from the 2022 lows. Investors are not running from riskier debt (high yield); they are embracing it at a slow pace.
3 Rules of Probability
3) If the S&P 500 is up more than 1% in the 1st five trading days of the year (Jan 2023 ), following a negative year (2022), then stocks gain about 15% in that new year (2023) 87% of the time. Correlation is not causation but aligns with the idea that stocks are a very forward-looking mechanism.
4 Consecutive gains
4) From October 2022 to March 2023 (2-quarters or 6-months), stocks gained nearly 20%. History tells us that type of move correlates with an average gain of 13.5%, 87% of the time. So, there's a 13% chance S&P 500 doesn't continue higher for 2023.
5 Change of Character
5) This is powerful. Since 1950, the market has never made new lows after holding above the 200-weekly moving average for Six consecutive months. Pretty simple - a "pure Change-of-Character" in the market.
6 Way to Bearish
6) Very Simple. When Investor Sentiment is this bad (the most anticipated recession in history), it usually coincides with the "Lows" ...Bottoms happen before people expect, and as people expect more downside, the lack of selling pressure becomes a tailwind in the recovery.
Thanks, Tom @ FundstratI hope this brought you some value. So far, Tom Lee's been correct, and I just wanted to highlight /simplify his thesis.Good luck out there!Jeremy Fielder