Equity strategist Tom Lee issued a mea culpa on Friday, telling investors that "animal spirits" have lifted equity prices well beyond what he anticipated earlier in the year. "Only two months into 2017, the S & P 500 has soared 7%, vastly outperforming our expectations for a 'flat to down' 1H [first half]— in short, we have been steamrolled," he wrote in a research note. "Our 1H caution was predicated on a flattening yield curve and typical 'payback' seen in post-Presidential election years. But we underestimated the positive impact that a surge in 'animal spirits' to drive equity ETF inflows (4X pace of 2016) and therefore equity upside." Earlier in the year, Lee, who was correctly bullish on stocks last year, became the most bearish soothsayer on Wall Street, issuing a 12-month price target of 2,275 for the S & P 500, or about 4.5 percent lower from its current level. "We have 'egg on our face' but still wait for a better entry point," he said. Lee points to historical analysis to support his call. Since 1974, he says that when "animal spirits" were this high, stocks often underperformed. "While we see rising 'animal spirits' as positive for economic growth … it turns out to be less positive for stocks," he said. Historical analysis by Lee, who is head of research at Fundstrat, shows that when consumer confidence and NFIB's Small Business Optimism Index were at similar levels as today, equity prices proceeded to post severe declines. Source: Fundstrat However, the one outlier was energy, he said. "The weak link has been energy, the weakest sector YTD (trailing by 1,060bp) — energy historically best sector when NFIB is top decile and consumer confidence 9th decile as well. Moreover, the group likely saw a 90-yr generational bottom last year," he wrote. The strategist identifies seven energy stocks that have lagged the market this year, but could be about to catch up with the rest of the group, especially if deregulation under President Donald Trump draws investors into the group.
