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‘There’s no way’ COVID-19 will cripple the U.S. economy permanently: Tom Lee

Tom Lee, Fundstrat Global Advisors Managing Partner & Head of Research joins Yahoo Finance's Zack Guzman to break down the latest market action heading into the first presidential debate.

Video Transcript

ZACK GUZMAN: There's a lot to digest here when it comes to renewed market volatility, especially with today's minute pullback for the time being. And here to answer all of that with us is our first guest today, our market savant here in Fundstrat Global Advisors Managing Partner and Head of Research, Tom Lee. And, Tom, I love having you on the show, obviously, because when we talk about this, you were one of those analysts that called that March selloff the bottom perfectly earlier this year when the selloff was in full force.

And now, you have a new line in the sand here to watch, and every time that happens obviously my ears perk up. You drew it at about 3,244 on the S&P 500, saying that that's the level where a lot of investors were pricing in the worst of what's to come. We closed right above that level last week. So talk to me about why that's the key level to watch in your eyes and where we go from here.

TOM LEE: Yeah, thanks, Zack. You know, stocks had a great run since March, but the next 36 days there a really important event risk on the horizon, which is the election. So I think markets are really nervous into this 36 days. And one of the things that we have to think about is, you know, when does nervousness price in the worst is yet to come. You know, when do you think the worst is priced in?

And we said from June to the August highs, if you give up 2/3 of those gains, which was also a Fibonacci 61.8% of the gains, that would be 3,224. So we think that that's when you start to price in the worst because you've given up 2/3 of the rally that we've had since June, and I think the world is better than it was since June. So that's where we would start to put capital. And it looks like that line in the sand has been holding, because it sort of played with it last week and we've closed above it.

ZACK GUZMAN: Yeah, and I mean from there you move up the Fibonacci retracement levels here, and you say the next key level to watch would be 3,363. Talk to me about why that matters here. And again, we're talking about something that maybe even some investors aren't necessarily in agreement with you in viewing this as, you know, just kind of a correction selloff to be looking at here. Some people might say it's the beginning of something more serious when we think about what happened back in March and when cases really started to rise. So why are you so sure that that's all we're dealing with here relative to what we saw back in March?

TOM LEE: Yeah, it's a good question. I mean, the future is uncertain, so I can't say I know what will happen in three months, either on the disease or the economy or markets. But I knew-- I do have a good sense of the probabilities and the kind of risk reward. I think stocks are not in a downtrend because number one, there's still $4.3 trillion of cash on the sidelines. I don't think in the history of any financial market in the world do you ever have a top when there's 20% of the equity market sitting in cash. Investor cash-- you know, that's excluding the private-equity cash, the record cash held by corporates, too. So you've got tons of dry powder.

People are bearish. You know, I mean, I can tell from our own client surveys, and I can tell by looking at the NDX Futures, which is the most record short of 14 years. And I look at AEI [INAUDIBLE]. You never have a top when people are bearish.

And then on the disease, you know, it's-- it's still a very scary disease, and the economy is in a depression. But one of the things that we started to wonder is, you know, are we starting to overreact to cases because, you know, it really going to matter if the cases are severe? I mean, for instance, we've been right about how colleges-- there have been almost no hospitalizations. And if you look at the number of new tests because tests hit almost a record for a Monday yesterday. Those incremental tests of 230,000, 43% more tests, only found another 1,200 cases in the US. So it's not like-- so I don't know. On COVID I'm still very concerned, but I think the market's not on a down trend.

ZACK GUZMAN: Yeah, that's the biggest question. And I know that you're not a doctor, and you've stressed that in both your client notes as well as when we've had you on the show, and that's fair. But you have been doing a good amount of research in terms of compiling the data around this and even talking to the researchers behind the IHME model here when we think about what the White House even looks at in terms of how bad this could get in the winter.

But I would assume-- I mean-- I mean, when we talk about cases rising, that's a fact that a lot of medical experts have been preparing for and saying the nation should be preparing for for quite some time. But in terms of the response to it, as you highlight there, I mean, we have seen cases rise maybe, but, you know, there's a lag between that hospitalizations and deaths here. But as you pointed out, on the college front it does seem that a lot of the outcomes this time around tied to that rise in cases has not necessarily hit in terms of deaths and hospitalizations the same way it had in the past.

I mean, when we think about maybe lockdown risks, because that's again the most direct tie-back to the economy in what we've seen on the underlying economic data, we've heard from the president as well as Larry Kudlow saying that that's not an option on the table. We see what's happening in Florida. We're on DeSantis there saying that he wants to open businesses back up. So I mean, when it comes to the appetite for lock down again, how does that play into maybe what you expect to see play out in Q4?

TOM LEE: Yeah. Um-- well, it's certainly adding to uncertainty. You know, colleges-- the one thing I would say is, you know, they-- colleges were 15% of cases in the first week of September. It's dropped to 9%. So colleges, despite people back to school, it's not causing a super-spreader, exponential growth and wave. It's almost like it's petering out in colleges-- shocking. And Florida, yeah, we'll know in two weeks whether or not that was good policy.

But I think it's correct to say we are now at the point where policy has to determine economic carnage against coronavirus. Because, you know, as we get to winter in the northern hemisphere-- northern states in the US, it's going to be pretty catastrophic for a lot of businesses to stay closed. And so, you know, it's a tough-- it's a tough policy decision to be at, and then until we have a vaccine or therapeutic. You know, I don't envy anyone having to make those decisions.

ZACK GUZMAN: So look let's look a little bit farther out on the timeline here too because predicting what's going to happen in the short term is always pretty tough to do. But beyond the election, in looking into 2021 and maybe even year end, I mean, your year-end price target is 3,525 on the S&P 500. Goldman Sachs out with their median price target here in a couple different scenarios tied around the election, at 3,600.

And their midyear target for 2021 comes in-- a couple different scenarios here-- 4,000 if they get a divided Congress, 3,800 they say if we get a Democratic sweep. I mean, when you look at it and where we might be mid-year next year, assuming we move forward in this progress we're seeing on the vaccine front and all the cash you've talked about sitting on the sidelines, I mean, are you in a similar view that we will be there in midyear 2021? And where do you see the opportunities still here if you're telling investors now is the time?

TOM LEE: Yeah, I think-- I think they're directionally correct. I mean, we're in a new expansion. I think economic policies between Trump and Biden will look very similar with the exception of maybe higher taxes under Biden. And if the economy isn't going to be harmed by either, then I think that's going to matter more in 2021.

And, you know, do I think that this virus is going to cripple the US permanently? There's no way. You know, the US is a dynamic economy. I think people underestimate that, you know. I mean, we're-- if people start businesses-- with business, this COVID thing is terrifying and sad and all the loss of employment. But it's going to get people to be innovative and start new businesses, so-- you know, in the short run it's very scary. But all-- you know, in the 2021 time frame, I'm very optimistic.