Tom Lee of Fundstrat thinks that stocks could see a big rally before the end of the year if Republicans win congress and the inflation report shows price increases slowing.
In a note on Wednesday, Lee said that he believed Republicans would take the Senate and that the October inflation report would show a 0.4% increase in core inflation. The events could set the stage for a new rally in the stock market.
If those conditions were met, Lee predicted that the stocks would rally 20% by the end of the year.
The market has been looking at a Republican victory in the election as a catalyst. The best performing environment for stocks could be stimulated by the expected decrease in government spending.
According to Lee, a Republican-controlled Congress could slash climate change initiatives and push fossil fuel activity instead. The war with Russia could lead to a resolution and lower oil prices if Republicans dial back support for the country.
This is positive for the stock market. The average 12-month forward return on stocks during those years was around 16%. When Democrats were in control of Congress and the White House, annual headline inflation was 4.3%.
Market volatility has been supported by that. The current trend in stocks is very similar to the one that took place in June. The Chicago Board Options Exchange volatility index has fallen faster than it did in June, which could mean a stronger rally is on the way.
Despite growing recession fears on Wall Street, Lee has been bullish on stocks all year and previously predicted that stocks could rally to a new all-time high by the end of the year.
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