Fundstrat’s Tom Lee thinks investors are underappreciating the drop in Wall Street’s “fear gauge” as one of the key drivers of this year’s gains. The S & P 500 is up nearly 12% through Thursday’s close and on Friday crossed above 4,300 — a level not seen since August 2022. Meanwhile, the Cboe Volatility Index (VIX) , the preferred measure of market volatility on the Street, has dropped to around 13.65, near its lowest levels since before the Covid-19 pandemic began in early 2020. “The VIX impact is the least appreciated” upside catalyst for stocks, said Lee, the firm’s head of research, in a Friday note. “Our work from December 2022 shows that in [the] last 30 years, post-negative equity year (2022), when VIX is down YoY, the median gain is 22%.” “VIX trajectory, in other words, was the single biggest determinant at the start of 2023,” he said. Lee is one of the biggest bulls on Wall Street, forecasting the S & P 500 will rise more than 20% this year. However, he pointed to two events next week that could be the “most critical” to the second half of 2023. May consumer price index release Tuesday : Lee said a month-over-month reading of less than 0.3% would be a “positive surprise” for the market. Federal Reserve policy announcement Wednesday : Investors largely expect the Fed to keep rates at current levels. However, Lee pointed out the fed funds futures market is pricing in about an 80% chance of a July rate hike. “If May Core CPI < 0.4%, then we see these odds dropping to zero for each month.” “Our view remains that inflation is tracking lower than consensus/Fed see and it is just a matter of time before the lagged CPI/PCE reports reflect this reality,” he said. “And if this plays out, the Fed’s pause will morph into a data dependent mode, where the bar is raised for further hikes.”
Drop in Wall Street’s fear gauge is the least-appreciated market positive, Fundstrat’s Tom Lee says