History Shows Stocks Have Done Well Even Under The Most Hawkish Fed, And Powell Doesn't Need To Crush The Market To Fight Inflation, Fundstrat Says

• Fundstrat's Tom Lee says stocks won't crash even if the Fed keeps raising rates.
• That's because stocks have performed well in previous Fed tightening cycles, particularly when rate hikes were predictable.
• Lee expects the S&P 500 to rise at least 20% this year, despite more bearish forecasts from other analysts.

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According to Tom Lee, Fundstrat's head of research, history shows that stocks have performed well even under the most dovish Fed, and Chairman Jerome Powell doesn't need to disrupt the market to control inflation.

In a statement on Wednesday, he reiterated his bullish stance on shares despite investor concerns about impending rate hikes. Central banks raised interest rates by 450 basis points last year to combat high inflation; Stocks are heavily weighted into 2022 and could continue as authorities signal more work to curb inflation.

But that shouldn't hurt stocks' success this year, Lee said, citing market performance during previous Fed tightening cycles. Of the 14 cycles since 1970, stocks have risen in 11 of them.

Lee described the rebound of former Fed Chairman Paul Volcker, who helped the central bank overcome stagflation and raised interest rates to 19 percent, sparking the Great Depression of the early 1980s. The Fed's most expensive, Lee said, but shares rose 15.6% during Volcker's tenure, Lee said, the biggest gain of any Fed chair.

That suggests stocks could do well this year if the Fed continues to raise rates. The S&P 500 posted two straight weeks of losses after central banks signaled more rate hikes were needed to curb inflation.

Analysts warned that the Fed could tighten the economy too much and that Morgan Stanley shares could fall 26% in the coming months.

But Lee argued that stocks could still hold by relying on data on labor market strength and Fed rate decisions, making hikes more predictable for the market.

"The bottom line is that a dovish Fed doesn't mean stocks should fall with every inflation data point," he added. "This means that a higher terminal rate is not the death knell for stocks."

Lee remains bullish on stocks, despite other Wall Street analysts forecasting the S&P 500 to rise at least 20% this year. Last year the index was forecast to peak at 4,800 when, in fact, it has fallen 20% for the year.

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