3 things point to a strong stock market rally through December even as election uncertainty looms, Fundstrat says

• Investors should "stay on target" and own stocks heading into year-end, Fundstrat's Tom Lee said.
• Lee cites declining margin debt and a dovish Fed as key resons to be bullish on stocks.

Investors should "stay on target" and own stocks heading into the end of the year, according to Fundstrat's Tom Lee.

In a note to clients on Wednesday, Lee offered three reasons he expects the stock market to finish the year strong despite the uncertainty around the Presidential election in November.

"The message is stay on target, and know that there's still firepower," Lee said.

That "firepower" refers to the fact that FINRA margin debt declined in August to $797 billion, well below its October 2021 peak of $936 billion.

FINRA margin debt measures the amount of loans investors take out to buy stocks. The indicator has a history of rising and falling with the stock market, and according to Lee, there's still room for upside in margin levels, suggesting that stock prices could see more gains.

"We really haven't seen tops until margin debt actually starts to really rollover," Lee said.

The potential upside in margin debt coincides with a Federal Reserve that has turned dovish, which should be a tailwind for stock prices, according to Lee.

Lee crunched the numbers and found that since 1971, the S&P 500 has seen a strong performance when the Fed started cutting interest rates at a time when the economy is still strong.

According to Lee, there have been seven instances of Fed rate cuts coinciding with a "no landing" in the economy, and the three-month and six-month forward stock market returns have a 100% win ratio with average returns of 8% and 13%, respectively.

That bodes well for stocks to continue hitting record highs through the end of the year.

"Don't fight the Fed," Lee said.

Finally, Lee highlighted that the S&P 500 tends to deliver strong gains in the second half of the year after a 10% gain in the first half of the year.

The S&P 500 surged 14% in the first half of 2024, putting this into play.

The data shows that since 1950, the S&P 500 has delivered an average second-half gain of 9.8% under such circumstances, with an 83% win ratio.

"The only down years were the 'hawkish' years of Volcker. But now, the Fed is dovish," Lee said.

He added: "Bottom line, stay constructive."