- Fundstrat’s Tom Lee says there’s good reason to believe this week’s two-day rise in stocks wasn’t another bear market rally.
- The company highlighted a “100% bid” day on Nasdaq, a 10% drop in JOLTS and stability in high yield spreads.
- “The promising aspect is that job openings are falling but unemployment isn’t rising,” Lee said.
The stock market’s back-to-back rally on Monday and Tuesday could be the start of a broader uptrend rather than a dead bounce, according to Fundstrat’s Tom Lee.
All major stock market averages gained more than 5% during the two-day rise, which was initially triggered by the UK government partially reversing its tax cut plans that rocked its bond market last month.
Stocks fell on Wednesday. However, according to Lee, there are many reasons to believe that the stock market rally could be sustained into the year-end.
For starters, the latest JOLTS data, which measures job openings in the US economy, showed the biggest drop ever by a pandemic, down 1.1 million, or about 10%.
This is good news for the Federal Reserve as Chairman Jerome Powell looks to dampen a strong labor market to tame inflation.
“The promising aspect is that job openings are falling but unemployment isn’t rising,” Lee said, consistent with what a soft economic landing might look like.
Other strong signs that the stock market rally may be becoming more sustainable include: a 5% fall in the US Dollar Index, a nearly 50 basis point fall in the expected Fed Funds Rate in May 2023 and stability in high yield spreads despite the decline in share prices.
“US high yield spreads failed to make a new ‘wide’ this past week as equities closed at new lows. Historically, this divergence needs to be observed as this similar pattern emerged when comparing October 2008 to March 2009,” Lee explained.
Finally, Tuesday’s stock market breadth, or participation, was incredibly strong. The Nasdaq 100 recorded a “100% bid” day, meaning every stock in the index was positive in Tuesday’s trading session.
“This has only happened six times since 1996, and six of the six times the Nasdaq 100 is higher six months and 12 months later with average gains of 27% and 34%,” Lee said. Additionally, there has never been a 100% bid day for the Nasdaq 100 during a bear market rally. “In isolation, that’s very optimistic,” Lee said.