Fundstrat’s Tom Lee says the stock market sell-off doesn’t indicate a recession is nigh, but the earnings season looks “ugly” and the U.S Federal Reserve is to blame.
Speaking today on CNBC’s Fast Money, the analyst, who appears lately to be receiving more and more criticism for his predictions, spared the numbers but doesn’t hold much hope for the upcoming earnings season. Lee had hoped for a 10% rally for the end of 2018 — now he says:
“This year may not be that great, we hoped for a rally into year-end…it didn’t happen.”
— CNBC’s Fast Money (@CNBCFastMoney) January 3, 2019
Apple Just The Beginning
Apple’s predicted revenue downgrade and subsequent share price fall, triggering another huge market sell-off, could be the tip of the iceberg according to Lee.
“I think a lot of things have happened in the last couple of weeks. I think probably the deadliest has been what the Fed has done. I think the Fed has really undermined liquid markets. […] That’s really worsened trading dynamics.”
Echoing the recent sentiment of U.S president Donald Trump, Lee believes the interest rate hikes by the Federal Reserve have had a greater effect on the Dow Jones and other markets than concern over tariffs and trade.
Other analysts have pointed to Trump’s behaviour towards the Federal Reserve itself as a recent trigger for market volatility.
Lee says that across recent interest rate hikes, each has triggered a strong market reaction.
“This is the most dangerous time for the Fed to hike, the December hike shouldn’t have happened.”
Trade Dynamics Are Transitory, Hikes Force Shrinkage
Trade dynamics, says the Fundstrat head, are arguably transitory with the potential for demand for goods to build up ready for more certain times. In contrast, interest rate hikes can force investors to sell.
“If you tighten financial conditions you force people to liquidate positions, forcing shrinkage. You see chaotic moves across markets, that’s damaging because that takes a lot of time to fix.
Lee also believes that rather than China experiencing a short-term economic contraction over trade disputes there is a longer-term economic motion:
“I think one of the structural shifts taking place globally is China’s contribution to global growth is actually shrinking relative to the U.S.”
Sales of the iPhone in China’s contracting economy are in part being blamed for Apple’s revised first quarter forecast and the sheer snowball effect to the stock market today. After the performance of FAANG stocks in the last quarter of 2018 a bad year for the stocks of technology giants like Apple, Facebook and Google is not wholly unexpected.
Twitter reactions to Lee’s latest predictions are interesting, with many suggesting he’s been wrong before and investors should take an opposing view of his predictions.
Featured image from Shutterstock. Chart from TradingView.