S&P 500 Could Rally Over 20% In 2023, Says Market Strategist: 'Akin To 1982 When Stocks Went Nearly Vertical'

The stock market has started off 2023 on a positive note, raising hopes of a revival after 2022's dismal showing.

What Happened: The S&P 500 Index could rise over 20% this year, going by the rule of first five days, Fundstrat’s head of research Tom Lee tweeted on Tuesday. When the S&P 500 Index is negative the previous year and gains over 1.4% for the first five days of the following year, the average annual return is about 26.4%, he noted.

See Also: How To Invest In Startups

Lee said the S&P 500 Index has gained about 5% year-to-date, surpassing the full-year return on cash, bonds and credit, with over 11 more months still to go. The S&P 500’s intraday low of $3,491.58 on Oct. 13, 2022, is increasingly seen as the low, he said. The fundamental case is premised on consumer price inflation retreating since October.

1/

YTD, S&P 500 is up ~5%

- surpassing the “full year” return on cash, bonds and credit, with 11.5 months left of 2023

- S&P 500 broke the downtrend in place since 2022

- and 10/12 $SPX 3,491 arguably increasingly viewed as low pic.twitter.com/S2RVCgIn7k

— Thomas (Tom) Lee (not the drummer) FSInsight (@fundstrat) January 25, 2023

Fed’s unforced error at the December FOMC meeting, where it raised interest rates by 50 basis points, relayed the message that inflation was hotter, sending stocks sharply lower in December. “If market view of inflation does leg down, investors will arguably look past the earnings ‘valley’ and focus on a more predictably/possibly easing Fed,” he said.

“As such, we think 2023 is arguably akin to 1982 when stocks went nearly vertical.”

The stock equity market had launched into a stellar rally in 1982 when the Fed began to steadily lower rates after reining in inflation. Fed funds rate dropped from a peak of 20% to 8.5% by the end of 1982.

Fed Likely To Make Course Correction: Lee argued the case of a decline in volatility. He expects the Fed to make a “course correction,” which means financial conditions ease and/or CBOE Volatility Index, or VIX, fall.

When the S&P 500 Index is negative in the previous year and VI is down in the current year, the average return would be 22.2%, he added. The equities are arguing that the far greater story arc is “inflation turned out to be transitory” rather than “stocks have downside because of EPS falling,” Lee said.

Price Action: The SPDR S&P 500 ETF Trust SPY ended Tuesday's session down 0.11%, at $400.20, according to Benzinga Pro data.

Read Next: Is 'Big Short' Investor Michael Burry Signaling Something Ominous With This Old Market Chart? 'Maybe'