Middle-market pundit takes bullish view as high-yield markets rise

Pessimism about the end of a seven-year bull market in public equities appears overblown based on movements in the high-yield-bond market and other indicators, an executive at an independent financial-market-research firm said.

“If you want to know what stocks should be doing, look at credit,” Thomas J. Lee, managing partner and head of research at Fundstrat Global Advisors, told middle-market deal-makers and investors on Oct. 24 at CohnReznick’s Sixth Annual Liquidity and Capital Raising National Forum in New York City.

“The credit markets are telling us the stock market is massively undervalued.”

While the high-yield market started out weak this year, it’s turned in big gains since February, he said. The sector is on track to rise 18 percent this year, which would make it the sixth best rally in the history of the asset class, he said.

“It’s a leading indicator,” Lee told about 200 people at the St. Regis New York hotel.

Known for being contrarian since his days as an analyst at JP Morgan and Salomon Smith Barney, Lee laid out a case for a more bullish view on the U.S. economy and stocks based on studying data going back to the 1900s.

While most deal-makers and forecasters remain bearish after a seven-year stock rally, Lee sees more triggers for growth in corporate earnings and stock prices.

Although middle-market PE firms don’t often put their capital into stocks, public markets shape valuations of private portfolios and reflect the overall deal-making environment for acquisitions and exits in the form of initial public offerings.

Among the factors fueling his optimism, Lee said sales numbers in S&P 500 companies have been rising, which indicates big growth in earnings, especially after years of cost-cutting. The oil shock has faded, with oil bottoming this year and rising to the $50 level, which will help the energy sector. Economic growth has been on the rise in India and the U.S.

Another encouraging trend is demand for home construction to match U.S. population growth. “We have a lot of catch-up spending to do,” Lee said.

Rather than the end of a bullish cycle, Lee said the current environment more closely resembles the period of 1952 to 1969, when the S&P 500 quadrupled.

“I’m not saying we’re going to see a replay of the 1950s … but you have to question the crowd,” he said. “If someone is positive today, they’re viewed as a nut case.”

Another positive indicator is the roughly $17 trillion in cash held by U.S. and Chinese consumers, he said. In the U.S., the public has been a net seller of stocks since 2006.

Asked which sectors he’d favor right now, Lee said strong equity prices in technology, energy and financials indicate coming strength in the economy. Investors should look toward out-of-favor sectors such as steel, oil, telecom and luxury goods for upcoming gains, he said.

“Make your shopping list out of things that are absolute dogs,” Lee said.

Action Item: Thomas Lee profile: http://www.fundstrat.com/firm/team/

A tourist mounts the “Charging Bull” statue as he poses for a photo near Wall Street on January 16, 2015. Photo courtesy Reuters/Carlo Allegri