Tom Lee: Why a Rocky Start to December Could Lead to a Year-End Rally

at Fundstrat and chief investment officer of Fundstrat Capital as well as a CNBC contributor. He's a calm person that that doesn't get too excited or or

worried, but this is not a portentious start for uh December given what what you were thinking. Although I remember last time

thinking. Although I remember last time you were on, Tom, you said um good year end action but rocky in the in the near term. That was about two weeks ago and

term. That was about two weeks ago and we've certainly seen that. Are you still uh bullish on on crypto and stocks going into year end?

>> Um I am. I think the biggest tailwind that's going to emerge in the next couple of weeks is around central bank.

The Fed is set to cut uh in December, but also today is the day that quantitative tightening ends. And as you know, the Fed's been shrinking its

balance sheet since April 2022. It's

been a pretty big headwind for market liquidity. The last time we had an end

liquidity. The last time we had an end to QT, quantitative tightening, was September 2019.

And if you look back at that period, the markets really responded well. I think

within 3 weeks, rallied more than 17%.

So I do think the timing of QT ending, which is now essentially QE starting, >> and the Fed and at a time when November kind of was topsyturvy. So I think

people got cautious, but now have to performance chase. And then you have a a

performance chase. And then you have a a really typically a seasonal tailwind. So

I I'm pretty bullish into December even with maybe the first day being rocky.

>> Yep. Um so it's still all about the Fed for you because I was thinking there there is a time when a market can hit an inflection point where the reason the

Fed is cutting um becomes a problem for the markets. That's what I thought with

the markets. That's what I thought with the jobs and everything else. it there

might come a time where surely Fed cuts or or the backdrop is that there is some weakness in the market in in the economy. You don't see that?

economy. You don't see that?

>> Uh I mean I'd say that the shutdown put a blackout on data and I think that created a bit of anxiety because you know markets like visibility but to me

the fact that claims have been behaving and that this the September jobs report kind of showed a a bit of a recovery. I

think the labor market's probably holding fine, but the Fed doesn't want that to worsen. But I think the inflation story is actually weakened a lot. So to me, the the Fed would be

lot. So to me, the the Fed would be cutting for the right reasons, which is as they look at the next 12 months, the tariff inflation impacts are fading, but

there's risk on the job market. So I

mean, I think it's cutting for the right reason, which is, you know, real rates are tightening if they don't cut. Here

here's what concerned me about a couple of weeks ago, Tom, with the market's behavior, and that was watching all of the AI high-f flyers dip and drop pretty

precipitously in some cases because it looked like the Fed wasn't going to cut.

That raised questions about what was happening in the private markets. And it

made me start to wonder, okay, are we looking at a lot of business models that don't work if the Fed doesn't continue to cut rates? are are these and are these the business models that are are

driving empowering the market right now?

That that that's the one thing that made me sit up and say, "Huh, that's a little different."

different." >> Yeah. I I think there was a lot a bit of

>> Yeah. I I think there was a lot a bit of soularching, Becky, in November because we know leverage rose um and we know there was deleveraging in in some markets like crypto and we know margin

debts high and I think that there was essentially a reset in November because you know the market had a 6% decline but the AI stocks and the meme names and a

lot of other names fell even more. So I

I think that that position reset has been healthy and I think many fund managers we talked to in November in the midst of all that kind of threw in the towel thought the year rest of the year was sort of a writeoff and and now if

December is strong there's going to be a a bit of performance chasing and I I think that's what you should typically expect in the final weeks of the year. I

thought it was um when we saw Bitcoin sell off and sort of the the high-f flyers sell off on the

notion that Pal got hawkish at that one whatever it was that one meeting and then Williams totally turned that around and and the Fed futures jumped and it became clear they're definitely cutting

again and we got very little for that uh with Bitcoin should be back at 100 if it really is totally dependent on uh Fed

easing and and if if it's a debasement trade, which people say it is, we didn't get much for now. Everybody, you're sure that they're going to cut. Now, there

was a time where we thought they weren't going to cut. What do we get for going back to cutting mode?

Uh yeah, I mean uh Bitcoin and crypto have been disappointing because they really took it in the gut in midocctober and then kind of got hit again when

you're right when the odds of a Fed cut dropped um Bitcoin fell and then now that the odds have recovered of a cut they haven't quite recovered.

>> I mean I think that that's still the lingering effects of that deleveraging that happened on October 10th. It's not

that different than the wipeout that happened in 2022 with FTX that took eight weeks. So, we're kind of emerging

eight weeks. So, we're kind of emerging from that. We're that's seven weeks in

from that. We're that's seven weeks in the rearview mirror. So, maybe in another week or two, I think crypto has fully washed out and that's when it starts to participate.

>> Yeah, wipeout's a bad word. If you could pick another one next time, Tom, we don't um you had very aggressive targets for the S&P and Bitcoin by the end of

the year. I mean, you it'd be crazy to

the year. I mean, you it'd be crazy to hit the the Bitcoin target, for example.

I don't know what that was. Uh, but

7,000 on the S&P is still something you think that can happen this year.

>> Uh, yeah. I mean, 7,000 is only 2% for S&P. Um, from here, I think 5% or maybe

S&P. Um, from here, I think 5% or maybe even 10%'s possible in December. So, I

think a >> 7200 7,300 is likely for S&P.

>> Ask you not to do that. You're giving me a target and a time. Don't Don't It's not good for your career. Don't do that.

You're gonna be wrong one of these time.

But you don't care, do you? You've been

right enough.

>> Well, I'm just looking at probabilities.

But you're right. We We've been wrong plenty times, Joe. So, I'm I'm okay being wrong, too.

>> Okay. I never have been really. I don't

think so. That would be a big shocker for No, that it does. It happens to all of us. How about Bitcoin? Would you

of us. How about Bitcoin? Would you

think you'd be happy with a hundred if it got back by the end of December, wouldn't you?

Yeah, in fact, you know, I think it was looking good, like you said, over the weekend and then we got a a dump, a decline, sorry. Um maybe because the

decline, sorry. Um maybe because the Bank of Japan looks hawkish, >> but um I I don't think the four-year cycle I don't think the Bitcoin high is

in place, >> but you're right. uh you know, we were too optimistic about this happening by December, but I do think Bitcoin can make an all-time high by the end of

January. So, I I don't think we should

January. So, I I don't think we should we should think the highs are in place for Bitcoin or Ethereum or crypto. So,

uh a lot of it's going to depend on equities recovering, which we expect it to, and that helps the animal spirits and I think a new Fed share will help.

And we have, as Becky said, when people got worried about a hawkish Fed, that kind of hurts the discount models, the discounted cash flow models like AI models, but it hurts crypto models, too.

So, if we have a dovish Fed, that's really a tailwind.

>> Tom, is there a point though, Joe and I were talking about this in the last block? Is there a point where a Fed

block? Is there a point where a Fed that's too dovish scares the markets because they're worried about inflation?

>> Uh, yes. uh the markets don't want the Fed to lose credibility and you know and the bond market will kind of protest if the Fed is too doubbish but I think when

I look at Fed fund futures especially implied inflation the market the bond market's more dovish than the Fed so it looks like the Fed is behind and that's why I think cuts are necessary

>> are you in town where are you >> yeah it's pretty I was just thinking >> I'm actually in Tokyo otherwise I'd be visiting with you in person That's magic. Yeah. Otherwise, you'd be here. I

magic. Yeah. Otherwise, you'd be here. I

was wondering. Uh, yeah. Could be

anywhere.

>> Looks pretty.

>> Yeah, it does. All right. Wow. No delay

whatsoever. If you were like down the street on Zoom, there'd be a delay or something, but you're in Tokyo. That was

great. All right, Tom Lee, thanks for the update.

>> Yeah, great to see you.