Benzinga - by Shanthi Rexaline, Benzinga Editor.
The market reversed course this week after a duo of inflation reports spooked investors by suggesting that rate cuts may not be imminent. A bullish analyst, who was accurate with his predictions in 2023, said on Friday that he sees the dip as a buying opportunity.
What Happened: The dips amid the broader market upturn have been shallow because investors are uncomfortably underinvested, said Fund Strat’s Tom Lee in a CNBC interview. This is evident from the measures of investor leverage, he said, adding that the margin debt was still below July 2023 levels and cash on the sidelines hit a record $6.1 trillion last week.
“Therefore these dips are opportunities to add,” Lee said. “I’ve been traveling Latin America for the past week, meeting with a lot of pension funds and we’re getting the sense that these investors are waiting for a dip. So as soon as you get some sort of wobble l like today [Friday], I think these are quickly met by buying,” he added.
To some extent, valuations are stretched, Lee said.
“Hedge fund positioning which does look extended and AAII tends to reflect bullish sentiment, but it doesn’t necessarily reflect actual positioning,” he said.
The other measures don’t necessarily capture what private bank and wealthy individuals and households are doing, and comments from wealth managers still suggest a conservative bias, he added.
“We are not really as exhausted in positionings or in sentiment as we were in October 2021,” Lee said.
Why It’s Important: The S&P 500 Index hit a fresh closing record on Tuesday and the Nasdaq Composite rose to a new peak last Friday. The reason for the retreat from these levels is apprehension concerning the possibility of the Federal Reserve beginning rate cuts by June.
If inflation remains contained, the central bank may have to reduce rates from multi-year highs sooner than later. So, the moot point is inflation’s trajectory.
That said, Morgan Stanley analyst Lisa Shalett sounded a note of caution. Easy financial conditions and excitement about AI are driving the surge, despite persistently high rates and negative earnings revisions, she said earlier this week.
She cautioned against investors pinning much hope on these items going forward. Liquidity infusion into the financial system from banks, money markets and government stimulus programs that more than offset Fed tightening may finally be drying up, and excess savings cushions are nearing exhaustion, she said. Shalett also said that the potential gains from AI may already be priced into stocks’ valuations.
The SPDR S&P 500 ETF Trust (NYSE:SPY), an exchange-traded fund that tracks the performance of the S&P 500 Index, ended Friday’s session down 0.69% at $509.83, according to Benzinga Pro data. The exchange-traded has gained 7.60% year-to-date and currently trades off the all-time closing high of $515.18 hit on Tuesday.
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