Now is the time to buy the dip in stocks as data shows inflation is falling and the market bottomed out in June, according to Fundstrat.
Stocks suffered their biggest one-day drop in two years on Tuesday after August’s Consumer Price Index report showed inflation came in slightly above expectations at 8.3%.
“But that doesn’t mean stocks have to break below the June lows,” Fundstrat’s Tom Lee said in a note on Friday.
Although that cemented expectations for another aggressive rate hike from the Federal Reserve, Lee pointed to the fact that inflation was still falling, down 0.8 percentage points from June’s 9.1% inflation. And of the 14 economic data reports that came out in the past two weeks, 12 showed signs of easing inflation, including the producer price index and the Institute for Supply Management surveys.
A historical look at the S&P 500 shows a bottom in the index after a peak in overall inflation.
Lee also noted that the percentage of S&P 500 stocks in a bear market — those down more than 20% from their 52% weekly high — was 73% in June, with anything above 70% typically representing a market bottom.
Lee thinks the recent selloff may have pushed the S&P 500 back above that line, another signal for investors to buy.
“Even for those in the ‘inflationist’ camp or even the ‘we’re in a long-term bearish’ camp, the fact is that if headline CPI has peaked, the June 2022 stock lows should be permanent,” Lee said. He previously predicted the S&P 500 would rise to an all-time high of 4,800, despite the index’s decline in the first half of the year. This would represent a 24% increase from current levels.