Yuri Gripas/Reuters
- Stocks won't be crushed even if the Fed continues to raise interest rates, according to Fundstrat's Tom Lee.
- That's because stocks have done well under past Fed tightening cycles, especially when rate hikes are predictable.
- Lee has predicted the S&P 500 would rally at least 20% this year, despite more bearish outlooks from other commentators.
History shows that stocks have done well even under the most hawkish Fed, and Chairman Jerome Powell doesn't need to crush the market to rein in inflation, according to Fundstrat head of research Tom Lee.
In a note on Wednesday, he reiterated his bullish stance on stocks despite investors' fear over looming rate hikes. Central bankers have raised interest rates 450-basis-points over the last year to tackle high prices – a move that weighed heavily on stocks in 2022, and could continue to do so as officials signal more work to bring down inflation.
But that doesn't have to hinder the success of stocks this year, Lee said, pointing to the market's performance in past Fed tightening cycles. Out of 14 such cycles since 1970, stocks posted gains in 11 of those periods.
Lee also noted the rally under former Fed Chair Paul Volcker, who helmed the central bank during the stagflation crisis and jacked up interest rates to 19%, sparking a deep recession in the early 1980s. That's the most hawkish the Fed has ever been, but stocks jumped 15.6% during Volcker's reign, Lee said, posting the highest gain under any Fed leader.
That suggests stocks could still perform well this year if the Fed continues to lift rates, despite a brutal few weeks for the market. The S&P 500 has posted two consecutive weekly losses after central bankers hinted more rate hikes may be necessary to lower inflation.
Analysts have warned the Fed could overtighten the economy, and Morgan Stanley said stocks could crash 26% over the next few months.
But Lee argued equities could still stay afloat, given the strength of the labor market and the Fed's data dependence for its rate decisions, which make hikes more predictable for the market.
"The point is that a tough Fed doesn't mean stocks need to fall at every hint of an inflation data point," he added. "This means a higher terminal rate is not the death knell for stocks."
Lee has stayed bullish on stocks despite omens from other Wall Street commentators, and predicted the S&P 500 would rally at least 20% this year. Last year, he predicted the index would soar to an all-time-high of 4,800, though it actually ended the year 20% lower.