One of Wall Street’s most optimistic forecasters, who accurately predicted the market’s performance in 2023, is now cautioning investors about an imminent downturn.
Tom Lee, the head of research at Fundstrat, anticipates a potential 7% decline in stocks later this month. Despite maintaining a bullish outlook for the entire year, this warning is uncharacteristic for Lee, who accurately foresaw the 24% gain in the S&P 500 last year and projected a new all-time high of 5,200 in 2024.
Lee explained on CNBC that there might be a minor new high by the end of the month, followed by a 7% drawdown. He attributes this caution to uncertainty regarding the pace of Fed rate cuts and recent economic data volatility.
Over the past week, stocks have already shown signs of weakness, influenced in part by comments from Fed officials expressing uncertainty about how aggressively interest rates should be lowered this year.
Fed Governor Christopher Waller’s suggestion that the Fed should refrain from hasty rate cuts until certain about achieving lower inflation briefly triggered a sell-off in equities. Despite signs that the economy needs more cooling before the central bankers consider scaling back monetary policy, concerns about a potential recession persist, especially with inflation at 3.4% in December, exceeding economists’ expectations, and stronger-than-expected retail sales.
The New York Fed now indicates a 63% chance of a recession by December, up from the prior month’s 50-50 chance. Lee believes these concerns will linger for several months, contributing to a downward trend in stocks.
He remarked, “We’re moving to a playbook of inflation slowing, the Fed wanting to keep real rates from getting too high, but we don’t know what kind of cuts and when those will happen. That’s the nervousness we’re going to have over the next six months.”
