Tom Lee’s Long-Term Bullish Scenario for the Stock Market
Thomas Lee, JPMorgan’s chief equity strategist, laid out his firm’s bullish stock market forecast to CNBC’s Becky Quick and Joe Kernen last week. Earlier in January, Lee provided a more detailed scenario on Bloomberg TV (available below). Lee’s forecast has raised the ire of the popular blogger at Zero Hedge [link].
Lee stated we’ve been in a bull market since 2009 and one of the hallmarks of the rally have been that data’s been good for some time, but investors have underweighted stocks, which is still the generally the case with the S&P 500 at 1500. Lee said his firm sees the short-term direction of the market being up and provided the scenario in which stocks continue to go up over the longer term.
Lee said investors still have a memory of 2008 which left a taint on owning stocks and the impression that it’s smarter to own bonds. With S&P earnings at $100, there is the notion they can’t go higher, Lee added.
Kernen pointed out that Lee had correctly called the market’s direction throughout this bull market, despite the numerous small pull-backs over the four years, and asked him what his longer term target could be.
Lee said he believed the cycle peak in earnings (S&P 500) would be closer to $150, which follows the typical pattern of S&P 500 profit cycles. Calls for a $100 peak in earnings are “killing the king too early,” Lee added.
Looking at multiples, Lee said mid-cycle S&P’s are at 17, while we’re at 13 or 12.5. CCC-rated bonds, if you invert their yields are trading at 11 times, Lee said. If you put a 17 multiple of earnings on $150, the S&P 500 peaks around 2400-2500 which would translate to, “around 18, 19, 20,000 Dow … that’s obviously 4 years away,” Lee concluded.
Earlier last month, Lee was on Bloomberg TV with Trish Regan and Adam Johnson and being congratulated for being the most accurate equity forecaster for 2012. In this interview Lee foresaw the first half of 2013 being “tricky” because the consensus was too optimistic. However, he expected dejected investors would drive the market higher in the second half of the year.
Lee projected that after a bullish start to 2013 there would be a 7-8% correction in the March through summer period dropping the S&P 500 to the 1350 level.
A couple of charts indicating trouble ahead were pulled up. Lee pointed out the percentage of NYSE stocks trading above their 200-day moving average was over 75% in December and whenever this happens a correction , or “death tap,” usually occurs within 7 months. He also highlighted Citigroup’s Economic Surprise index which was rolling over which typically leads to a stock market “death tap” in 3-6 months.
Once the S&P 500 reached 1500, investors should use tight stops on their positions, Lee said. He believed cyclicals, represented by stocks such as Gardner Denver (GDI) would be the best sector for 2013, partly because Europe and China’s economies appear to be turning up. Lee also pointed to an upturn in the Purchasing Manager’s Index (chart shown in video below) to bolster his bullish view of cyclicals.
Lee didn’t find utilities to be a cheap sector, but were probably a reasonable alternative to bonds.