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Tom Lee on market outlook: Investors should expect 'good things' to happen in 2021

Fundstrat Global Advisors Managing Partner & Head of Research Tom Lee joins Yahoo Finance Live to recap how markets fared in 2020 and weigh in on the outlook for the new year.

Video Transcript

ZACK GUZMAN: Not a lot of people have been correct in calling the action we've seen. Of course, not a lot of people could have predicted we would have seen a pandemic. But after we did get that news and saw the way it impacted the market, there have been few people more correct this year than Fundstrat's Tom Lee.

Wanted to just spotlight what he's called this year in 2020. Back in the darkest part of the sell-off in March, when everyone was panicking, Tom called for a rebound to 2,800 on the S&P 500 by April and called for all-time highs in just four months' time. We hit 2,800 in April as he predicted. He said that confirmed the thesis and the stock market would be-- well, would be back to the levels we saw before the pandemic. And that also played out.

During the September sell-off, he called the line in the sand at 3,200, roughly about that. And sure enough, we bounced off that. And then finally, in the post-election sell-off, he said to keep your eyes on the VIX. If we hit 25, he said that the market would be overlooking those election challenges by President Trump. And sure enough, we did see that play out as well.

So I want to bring on the man himself here with us in Fundstrat's Tom Lee here. And we'll give the formal title, Fundstrat Global Advisors Managing Partner and Head of Research. And Tom, congrats on the great year, man. I mean, like I said, few people have been as right as you.

And I love your takes because they're all based on data and history. And looking back on the history we've seen play out here, you're looking ahead to 2021. And you're saying the first half of the year might be a tough one for investors to stomach before we bounce back. So what should investors expect next year?

TOM LEE: Well, I think that, you know, as we look back on 2020, the world got lucky. And so stocks were able to look past a lot of bad things. But enough good things were happening for the market to rise. Those good things are getting stronger next year, Zack, like profit margins are going to recover strongly. We should get a pretty big PMI boom.

I think consumers are going to feel a lot of relief once we vanquish COVID. And, you know, if interest rates remain low, which we expect, then you're talking about a big negative rate environment while GDP's growing. And finally, the VIX, which you kind of mentioned, could fall even into the 17, 16 range.

This really is great news for stocks. But I do think it's like 2020. It could be really tricky. And I think in the first half, we might make our way towards, like, the 4,000 level and then fall back to 3,500. And of course, you've got to be ready to take advantage of that because that's not the end of the bull market. It's just the pause that refreshes.

AKIKO FUJITA: There seems to be a key qualifier in there, though, that once we vanquish COVID, which is something that that hasn't been done, obviously. You look at a place like California. We've seen a significant uptick over the last 48 hours or so, with hospital capacity now at 0%. When you look at where things stand right now, how much of this thesis that you've put forward is contingent on 75% of Americans getting vaccinated, as Dr. Fauci has said that's needed for activity to resume to pre-pandemic levels?

TOM LEE: Yeah, foremost, COVID's unpredictable. So I have not been able to find a good way to forecast it, and we have not. And so to me, it is completely unpredictable. So you're correct. That's the biggest risk.

But we also know that if you implement a strict lockdown like Europe just did, COVID rolls over hard. So, I mean, it's not like the US doesn't have options.

Listen, you can't ignore what Fauci or Gotlieb say. These guys are experts. But one thing to keep in mind, it looks like if, you know, if you tabulate the infections in the US so far, plus make some assumption about unreported cases, we're already-- we could be as close to 25% or 30% of Americans have been infected by the spring.

And so then if we vaccinate another 30%, which is about 100 million, and that's a lot, that would be over what the threshold is considered for herd immunity. So I don't know and I'm not an expert in that. I think if we have a correction in the first half, it's probably because of all these unknowns that you and I just discussed. I mean, I don't know what COVID's doing. And it's still the dangerous virus, so I don't-- I think everyone has to be careful.

ZACK GUZMAN: Yeah, and Tom, I mean, to Akiko's point there, it's a big question mark. But when you look back historically, and we show the chart here in terms of what to expect, we saw a run up here, 63% since those March lows. But when you look back at history, you're looking at a few years there in 2009 to '11, as well as back earlier in the '80s. So what does that kind of indicate in terms of maybe what investors should be braced for if we do get a bit of that correction in the first half?

TOM LEE: Yes. I mean, the first thing I think to keep in mind is, you know, it's going to be really healthy for stocks to get turbulent. But as we go through it, it's going to be terrifying. I mean, if we go down 15% or from 4,000 to 3,500, a 500 S&P point decline, it's going to feel like calamity. And people are going to be raising more cash. And there's already $4 and 1/2 trillion of cash on the sidelines.

So you can imagine a lot of people who have been sitting on the sidelines going to say, like, I'm putting, like, a vault, a forcefield around this cash. So you're going to talk about skepticism really growing. But that's how stocks can stage an even bigger rebound in the second half.

So I think it's going to be healthy. It's going to be really scary. I wouldn't-- if I'm long-term focused, I wouldn't be a seller. But if I'm tactical or if I had a ton of gains and then January we see S&P 4,000, maybe it's good to have some dry powder.

And, you know, just another thing I'd point out, I mean, you know, the expansion is going to be strengthening next year. So I think that the fear of calamity should be mitigated by the fact that we'll have more visibility.

AKIKO FUJITA: Tom, when you look at the sectors you're overweight on going into next year, energy one of those. And I am curious how you're looking at that space right now. Is it about the renewables for the clean energy on the expectation of more aggressive climate policies being put forward by the Biden administration? Or is it more about tracking the bounceback as we anticipate the economies to open back up in a more significant way?

TOM LEE: Yeah. Well, foremost, energy is our long shot top three. So we have three sectors we like, but energy is, I think, our longest shot. You know, maybe a bit-- not a dice roll, but the one that you have to be-- to realize it could be the diciest.

But I think it's a bit like cable or how wireless recovered. You know, energy has the supply and demand dynamics. And, you know, supply was a problem the last couple of years because so much drilling. And that's going to be slowing. And then in 2014, 2016, when the industry had financial trouble, there was all this private equity money that came in, so there was too much capital. But that's not coming in anymore. So you have two constraints on supply.

And then demand should improve next year because of the recovery. And so you have a real improvement in supply demand. So less bad, as Tom Luddy, who was essentially CIO of JP Morgan Asset Management, always said, less bad is good. I think that's happening with energy, and that's kind of how cable and wireless really came out of their bottoms.

So it's more the carbon energy that could do well. But it's a dice roll-- not a dice roll. That's the wrong word. It's not as clear cut as being long industrials or consumer discretionary.

ZACK GUZMAN: Yeah, you-- you-- you've been pretty clear on your last appearances here. You like those epicenter stocks that you talked about, some of those that have been most hard hit, whether you're looking to the restaurants, the casino stocks, airlines as well as some of the other ones you've highlighted there.

But let's talk about another-- let's continue the term of dicey role here because I think this one, I think we can both agree, perhaps a little bit dicier when we look at crypto. I highlighted a lot of the things you were right on there. Just to give the appearance of being fair here, there was one call when we chatted back in 2019 when we were talking about bitcoin maybe potentially reaching 20,000 to 40,000 by the end of 2019.

Maybe a little early on that one, but we're there now. So what does the crypto outlook look like to you and how investors should maybe be looking into the momentum that bitcoin has behind its back?

TOM LEE: Yeah. Yeah, bitcoin-- you know, if I had to say 2020, what has it brought, it's brought more relevance for digital currencies, you know, because these are free from interference from government. They are fixed in supply, so they are not hurt by central bank, you know, liquidity. And it's a way for people to protect assets.

Because I think there is a lot of insecurity about how safe the world is. So that's why we've seen some financial institutions and some really smart commodity and macro investors get involved with bitcoin this year. I think it's really validated what-- you know, what the fringe would have always argued that this is eventually going to be an allocated asset.

You know, we have always recommended 1% to be allocated to bitcoin. I think it-- really it's too low. It needs to be a higher percentage. But 2020 returns are a lot like 2016, and that happened after the halving. So I think 2017, which was the year bitcoin last went a little crazy, 2021 would be the year where you might see that in bitcoin.

So if anyone is interested, it's still quite early in bitcoin. Because, you know, 2017 the returns were astronomical for crypto.

ZACK GUZMAN: Is 20,000 to 40,000--

TOM LEE: I'm not saying it's going to happen.

ZACK GUZMAN: --are you still-- is that-- is that still the target, though, to keep eyes on, 40,000 being the top?

TOM LEE: Well, you know, I think that the easiest way for people to think about the upside for bitcoin its displacement of gold. And gold is, you know, $7 to $9 trillion of just above ground supply. And so that would put bitcoin well above those levels. It's, you know, a lot higher.

AKIKO FUJITA: OK. We'll check to-- check in with you to see where those target stands, although bitcoin today below that $23,000 record it set yesterday. Tom Lee, it's always good to talk to you, managing partner and head of research at Fundstrat Global Advisors.