Investors should 'run into the fire and buy the epicenter of the crisis': Tom Lee

Fundstrat Global Advisors Managing Partner & Head of Research Tom Lee of joins Yahoo Finance’s Zack Guzman to discuss the market outlook as coronavirus cases in the U.S. surpass 450,000.

Video Transcript

ZACK GUZMAN: For more on this, though, and how it pertains to the market action we've been seeing play out, interesting moves there, and potentially an all-clear sign from one of the largest-- I guess loudest bullish voices that we have on Wall Street. And joins us now. Tom Lee, Fundstrat Global Advisors Managing Partner and Head of Research, joins us on the Google Hangout.

And Tom, interesting that you've been tracking the way-- more quickly than ever, it really kind of fell into this bear market, when you look at history. And you're saying that that's reasons to believe that the upside rally, actually getting back to where we were before all this started, should also be relatively quick as well. What's the level you're watching right now? And should investors be buying this as something more than just a bear market rally?

TOM LEE: Yeah, I think investors should realize that the stock market is discounting information. So we can't tell it what to do. And the fact that it recovered 2,793, it's a big deal, because that's a 50% recovery of this crash from February to March 23.

And if you look back at 1987, '02, or even '08, '09, when the stock market had recovered half of its losses, it was already deep into a bull market recovery. So I think the move today is pretty decisive. And I think it just shows you, the playbook that you have to use right now is not your common sense. You can't say, oh, well, everything's going to be bad, so everything has to go down.

At the end of a downturn, the stock market recovers way before fundamentals return. So I think that's what your viewers have to keep in mind.

ZACK GUZMAN: Yeah, I mean, that's-- that's kind of the counterintuitiveness of what you're raising here, right? Because you would think, all right, if we are so quick historically to come down-- I mean, think about peak to trough. I mean, the S&P 500 was off, what was it, 33% in just a matter of weeks here, right?

When you look at it, I mean, you would expect, oh man, things must be bad, where it's being record unemployment numbers here. So things are terrible on a historical level. You would think that it would need to take even more time to recover.

But that's not what you had predicted. When we were back towards that bottom, you went back and looked at the data, and said, all right, we fell over that time, it was six weeks. Therefore, recovery should only take about half that time, if you look back at history.

And now, here we are, basically three weeks to the day later, and we are back-- back at that 50% retracement level. So what does that say here about how we look in Q3, Q4, later on in the year?

TOM LEE: Yeah, well, I think it's important. I think you bring up a good point. You know, we-- a few weeks ago, we looked at the ten declines really in the last two centuries of 30% of the stock market. And there's a lot of symmetry.

So the speed that you fall tells you how quickly you recover half your losses, and actually how long it takes to recover your full losses. And back then, it said if you fell over six weeks, you'd be back to 2,800 by-- within three weeks, which really shows history is really still a good guy. That same model says we should be making all-time highs in roughly three times the amount of time it took to fall, which means if we fell over six weeks, sometime in July, August, September, we may be back at all-time highs.

And I know it sounds insane. And I know everyone's rolling their eyes. But you know what? We've already recovered half the losses in what history says should have taken place, half in three weeks.

ZACK GUZMAN: That's kind of-- I mean, it's insane to hear now, but this is after we've already kind of rallied back here, right? And that's kind of the other crazy part of this, is that you made that call that it would play out exactly this way basically when we at the bottom, right? If that is the bottom to play out. I mean, that would have been even more insane to think about it.

So, I mean, I guess that would only make you a little bit more confident in your call that we would get back to all-time highs, as insane as it sounds, by Q3 here. But technicals aside, what fundamentals underlying all this would make you even more confident in that too? Because we keep seeing, as we just mentioned, record unemployment claims.

What kind of would be the impetus? Is that to say the Fed's actions are clearly enough to overwhelm it?

TOM LEE: I think there's a lot-- there's several-- I would say I can think of five reasons this is happening. So again, I'm not trying to tell the stock market what to do. But I'm saying the stock market is telling us a fierce recovery is probably coming.

And I think a couple things that are really important to keep in mind-- number one, I do think we're under shooting on the health care crisis. I mean, the deaths are coming in far lower than expected, and we're peaking a lot sooner. And remember, the faster we end the crisis, the faster we can get back to work.

I think another important thing to keep in mind is-- and this is a tragedy, but if you look at the income effect of the claims that have been filed in the categories, so far, it's about 0.3% of total personal income. Even though it's 16 million claims, it's a tiny fraction, because you remember, we have an unfair economy. There's just so many rich people. The income effect is quite small.

The third thing to keep in mind is labor intensive businesses are really easy to restart. A restaurant, if it already has its lease and it has its equipment, and it already has its approvals by city hall-- remember, Chipotle can open restaurants quickly. Then rehiring people can be really quick. So I think that the stock market's telling us that the economy is going to be pretty V-shaped.

And look back at every bottom-- '87, '09, '02, '74-- stock markets bottom before jobless claims peak. Stock markets bottom before consumer sentiment bottoms. It always bottoms-- it bottoms a year ahead of GDP.

So if the stock market's rallying, instead of saying, oh, everyone's really crazy-- and they might be-- I just think it's telling us we've already discounted the worst.

HEIDI CHUNG: Tom, it's Heidi here. Not to play devil's advocate, but if we're taking a look at certain aspects of the market, specifically the small caps-- I mean, they've had a pretty good week. But for a while now, they've been underperforming the broader market. And a lot of folks look to it to sort of find direction with where the economy is going. So in that case, is it necessarily saying that there's a V-shape ahead?

TOM LEE: Well, you know, small caps are correlated to really three markets. One is high-yield. I mean, high-yield's really, really tough right now. So if I had to say, what is your risk of being too constructive-- you know, high-yields is tough, but it's getting help from the Fed.

The second is emerging markets as a high correlation to small caps. And emerging markets isn't going to go anywhere until the US turns back on. And the third is that, you know, small cap stocks aren't as strong as US blue chips. I mean, US-- look, these US S&P large caps, they're just going to be bigger winners after this, right?

I mean, after this, more assets are coming back to America. US consumer was strong before. They're not taking as big a hit as people think. They're going to come back strong.

And then, you know, I actually think the stimulus came really lightning quick, which is so good. And I think policymakers have done a pretty good job. And that's a big deal, that they're usually are so late in a cycle. They're coming in really early. So maybe this is showing you policymakers can stave off a deeper decline, but I don't know.

ZACK GUZMAN: Real quick before we let you go, too, I know you highlighted-- we highlighted your note on the show on Tuesday, looking at some of these company-specific stocks that had been hit the hardest. And those might tend to be the ones that would rebound the quickest as well, when we're thinking about this. You mentioned labor being a key element of that.

And when you look at the restaurants, I mean, a lot of those were the epicenter of where the pain was. You can look at Darden Restaurants as a key example. If all of what you're saying is true, are you still convinced that those would be good places to put your money, despite all the risk if that doesn't come to fruition?

TOM LEE: Yes. So I think that people need to use the '08 playbook, which is they have to run into the fire and buy the epicenter of the crisis. Because social vic-- social distance victim stocks didn't do anything. And the government and policymakers aren't going to punish shareholders for that.

They got hit the hardest. But they're also beneficiaries of high unemployment, because labor cost is the biggest expense for them. As you point out, like Darden or Gap, they might have like a $30,000 market cap per employee. So if they can actually rehire skilled people at lower cost, it accrues hugely to an equity shareholder. Just a 2% reduction in salary in hiring-- rehiring cost is like 10% to the equity.

So it's a big deal. And again, I'm not trying to be insensitive. Because I'm actually probably sounding insensitive.

But I'm saying that in '08, you had to buy what got wrecked. And what got wrecked in this cycle, it's the hotels, casinos, airlines, the aerospace. These are going to be better companies on the other side.

ZACK GUZMAN: And as you point out, a lot of that has to do with the fact that the government was quick to bring in aid here, too, to hit some of these companies, and make sure that they are able to function as well. But Tom Lee, I mean, right now, at least as this stands, we look at that retracement level, what you called, we're sitting there right now, above it-- 2,800 on the S&P.

So we'll see what happens with the second part of that call, potentially all-time highs by Q3. But for now, accurate as you are, thanks again for coming on. Appreciate it always.

TOM LEE: Yeah, thank you.

ZACK GUZMAN: All right, thanks Tom.

TOM LEE: Have a great weekend.

ZACK GUZMAN: Yeah, you too.