Stocks could break out of their 'doom loop' this week amid a flurry of catalysts in the bond market and the economy, Fundstrat says
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- Stocks could break out of their downward slide thanks to a series of catalysts this week, Fundstrat said.
- A slew of policy updates and economic data points could help stocks move higher.
- A key bond market update is more important than the Fed meeting, Fundstrat's Tom Lee said.
The stock market could break out of its decline this week, thanks to a series of developments with the potential to move markets, according to Fundstrat's head of research Tom Lee.
Lee, among the most bullish forecasters on Wall Street, said that stocks could finally start ticking higher this week after several months of turbulence, with investors waiting on key policy updates.
"I think there is enough incoming data this week along with the negative positioning for stocks to finally break this doom loop," Lee said in a note to Fundstrat clients on Monday.
Markets are expecting key economic data points, such jobs data, manufacturing data, and services data this week. Those datapoints are likely to point to some softening in the economy. Weaker economic data would be good news for investors, as Fed officials have been looking for signs the economy is cooling before committing to ending their campaign of interest rate hikes.
Investors are now pricing in a 95% chance that the Fed will choose to keep interest rates unchanged on Wednesday, per the CME FedWatch tool. A likely pause this week by the Fed would provide a boost to equities, Lee said.
But there's one particularly catalyst for stocks that's even more important than the Fed's update.
That's the US Treasury quarterly refunding announcement due Wednesday. The update, due shortly before the Fed announces its policy move, will provide a window into the Department's plans for issuance of short and long-term Treasury bonds. According to Reuters, experts say that the Treasury could increase supply of shorter-term bills while pulling back on issuance of longer-dated securities out of concerns over the impact it could have on yields.
Near-5% Treasury yields have caused panic in the stock market and has helped drive a fresh increase in borrowing costs for consumers and companies.
"This is a 'supply' event for bonds and as we know, interest rates have been rising. So how the Treasury announces its upcoming mix of bonds, this will be market moving," Lee added.
Other market commentators have been cautioning investors as interest rates look poised to stay higher-for-longer and a potential recession looms over the economy. Markets are currently flashing three warning signs that the economy is beginning to slow, according to Societe Generale, which puts stocks at more risk of downside.