The stock market may finally break free from its recent slump this week, propelled by a series of catalysts that have the potential to stimulate positive movement, according to Tom Lee, head of research at Fundstrat.
Lee, known for his bullish outlook on Wall Street, sees a window of opportunity for stocks to rebound following several months of turbulence, with investors eagerly anticipating critical policy updates.
In a note to Fundstrat clients, Lee expressed his optimism, stating, “I think there is enough incoming data this week along with the negative positioning for stocks to finally break this doom loop.”
The market is poised to receive crucial economic data points this week, including job data, manufacturing data, and services data. These data points are expected to indicate a degree of economic softening, which could be viewed positively by investors. Federal Reserve officials have been monitoring signs of economic cooling before committing to a conclusion regarding their campaign of interest rate hikes.
Investors are currently pricing in a 95% probability that the Federal Reserve will maintain the status quo by keeping interest rates unchanged during its upcoming meeting, as indicated by the CME FedWatch tool. Lee suggests that if the Fed indeed pauses this week, it could provide a significant boost to equities.
However, among the various catalysts, one factor stands out as even more critical than the Federal Reserve’s decision.
The United States Treasury is set to make its quarterly refunding announcement on Wednesday. This update, released just before the Fed’s policy announcement, will offer insights into the Treasury Department’s plans for issuing short and long-term Treasury bonds. According to experts cited by Reuters, the Treasury might increase the supply of shorter-term bills while reducing the issuance of longer-dated securities, driven by concerns about their impact on yields.
The recent surge in Treasury yields to nearly 5% has caused concern in the stock market and led to an uptick in borrowing costs for consumers and businesses. Lee emphasized the significance of this “supply” event for bonds, particularly in the context of rising interest rates, stating, “So how the Treasury announces its upcoming mix of bonds, this will be market moving.”
While some market observers have been sounding the alarm as interest rates appear set to remain elevated, and the specter of a potential recession looms, others have noted that the market is showing signs of an economic slowdown. Societe Generale, for instance, has identified three warning signals indicating a slowing economy, which could increase the vulnerability of stocks to downside risks.
In conclusion, the stock market may see a positive turn of events this week, driven by multiple catalysts including key economic data, Federal Reserve action, and crucial updates from the US Treasury, as investors look for signs of economic stabilization and reduced pressure on interest rates.
