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Investors should buy the recent pullback in equities, said Fundstrat’s Tom Lee.
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He called the sale in response to ADP’s hot jobs report “overdone.”
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But the economy is actually “sliding into expansion,” Lee said, trading stocks for gains.
The buy-down regime in equities is back – and investors should benefit from the recent pullback in equities as the economy expands, according to Tom Lee, head of research at Fundstrat.
Lee, who has been bullish on equities through much of last year’s bear market, pointed to the sharp drop in stocks on Thursday after ADP’s payroll report showed the private sector created 497 000 jobs last month, about double what economists expected.
This sparked a strong selloff, with the Dow Jones losing more than 300 points on Thursday as investors anticipated further interest rate hikes from the Fed.
But fears of further Fed tightening are largely unfounded, Lee said, because the most important indicator of inflation in the labor market is wage growth, rather than the number of jobs created. Indeed, higher wages may induce firms to raise prices, triggering a wage-price spiral that may worsen inflation.
The percentage of small businesses that raised wages just fell to its lowest level in two years, according to the latest Small Business Report. This could be good news for the inflation outlook as well as for stocks.
But Lee’s comments came before the Labor Department released its June jobs report early Friday. It showed that while hiring slowed, wage growth was stronger than expected, pushing stocks lower.
Meanwhile, he also pointed to the recent correlation between rising Treasury yields and corporate earnings. It’s a sign that the economy is “falling into an expansion,” not a recession, he said, adding to the bullish case for stocks.
“We consider today’s selloff to be largely noise,” Lee said in a note Thursday. “The ‘hot’ jobs number is in wages, more than real jobs added. In the meantime, we think markets have entered a ‘buy the dip’ regime where pullbacks of 2% must be purchased,” he added later.
A cooler labor market is good news for equities, as tight employment conditions can worsen inflation. Central bankers, meanwhile, have raised interest rates aggressively over the past year to rein in high prices, which has weighed on the S&P 500 down 20% in 2022.
In a previous note, Lee predicted the benchmark would hit a new all-time high of 4,825 by the end of 2023, representing a 16% rise for the year.
His view, however, is contrary to other Wall Street strategists, who have sounded the alarm about a coming recession and headwinds for stocks over the past year. The economy has a 71% chance of sliding into a recession by May 2024, according to the latest projections from the New York Fed.
Read the original article on Business Insider