So Many Worries, Here’s Some Hopium

So Many Worries, Here’s Some Hopium

What, me worry? That old saying from Mad magazine, a satirical comic book that died in 2019 after a 67-year run, was ironic and meant reveal the opposite sentiment: we should worry about everything.

Plenty of things worry us right now: inflation at a 40-year high, oil prices at an eight-year high, rising interest rates, war in Ukraine which could spread to the Balkan states next, the never-ending story of the next Covid-19 outbreak…

(He pauses to take a deep breath and continues) … supply chain disruptions, product shortages on store shelves, eroding infrastructure, declining productivity, a supposed labor shortage, massively high government debt, high trade deficits with China, a possible recession.

And in the face of all this, Wall Street’s biggest worry of all: the Federal Reserve is pulling a double-whammy. It is hell-bent on raising interest rates, which will reduce lending, investing, and growth if the Fed overdoes it.

The Fed also is reducing its swollen $9 trillion balance sheet by cutting back on a program known as “quantitative easing,” reducing the bond purchases that have made stocks the more attractive alternative for years.

No wonder stocks are down this year, with the tech-heavy Nasdaq index down 14%, down twice as much as the decline in the S&P 500 ( off 7.3%) and the Dow Jones Industrials (down 5.5%). Investors doubt the Fed will get this right (see Part One of this series), and those with the most to lose could use some expert advice (see Part Two).

Whatever happened to the Wall Street adage that markets climb a wall of worry?

Market guru Thomas (Tom) Lee, co-founder of research firm Fundstrat Global Advisors, has a bold answer for that: he says stocks are going to climb a wall of worry and head back up. Forget the fears.

Lee, whose clients include influential, against-the-grain hedge funds, believes fears of an imminent recession are overblown and based on a misreading of the data. High inflation will be temporary rather than sustained, he argues, a distinctly minority view he explains in great detail in a 15-page report in his newsletter, FS Insights.

If he is right, stocks are a buy and they may resume their climb for another couple of years. Lee “has been dismissed and derided for being a permabull. The Wall Street analyst has also been right,” The Wall Street Journal said in a profile of him in January 2021.

Example: as the Covid-19 pandemic spread in March 2020, and the Dow fell a frightening 30% in three weeks, down more than 8,000 points to 18,591 by March 23rd, Lee got on a call the next morning with a thousand clients and told them it was a mere flesh wound—stocks would hit record highs by the following August.
He was dead-on right.

Recession fears are rising because of a critical early signal: an inverted yield curve, which has preceded most every recession since the 1970s. An inverted yield curve is what happens when the yield on two-year Treasury notes is higher than the yield on 10-year notes.

Usually, 10-years should pay higher rates because you have to lock up your money five times as long before getting it back. When 2-year notes pay even better, this dries up short-term capital that otherwise funds business growth, so, economic weakness lies ahead as a result.

It just happened again, on March 29th—for all of five minutes. Yet Lee argues that, in reality and adjusted for the inordinately high spike in inflation right now, the yield curve didn’t invert at all.

He says high inflation is a temporary response to three waves that won’t last: the first wave of Covid-19 shutdowns and supply chain shortages; the second wave of “revenge spend” on pent-up demand; and the third wave of a price surge in commodities driven by Russia’s invasion of Ukraine.

This would mean stocks “are still ‘whispering’ bottom,” Lee writes. If this man is right, another leg of the bull market could begin soon, and investors should be ready for it.

Jason Prattes is CEO of Prattes Wealth Partners in Newport Beach, Calif.

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